Put ‘Rules of Thumb’ to Bed!

Tuesday, January 13th, 2015

As we begin the new year together, it’s a the perfect time to integrate and install each step in The Relaxing Retirement Formula so you can continue to maintain the financial confidence you need to live exactly the way you want without worrying about money.

Before we do that, however, I have to share a conversation I recently had with a very nice couple who was referred to me by one of our Relaxing Retirement members.

They were very well read and brought a lot of questions to the table which I really appreciate.

What motivated this couple to see me was the fact that the husband was planning to retire after 30 years with his employer, and they now wanted to get a handle on The right investment allocation in retirement.

Note the emphasis on “The”!

They did a lot of investigation and research, and the theory that made the most sense to them was the “100 minus your age” rule of thumb.

If you’re not familiar with this all too common theory, it suggests that the percentage of your overall investment allocation you should invest in equities (stocks or stock funds) is “100 minus your age”.

So, for example, if you’re 65 years old, you should allocate 35% to equity based investments. (100 – 65 ( your age) = 35%)

Now put your ‘rational’ hat on for a moment and think about this for a moment.

Based on this theory, everyone who is 65 years of age should invest 35% of their holdings in equities.

It doesn’t matter what your circumstances, priorities, or tolerance for risk are.

This is what is known as a classic “rule of thumb”, and as you can probably imagine, I have significant challenges with it for you.

Rules of Thumb

For starters, why do ‘rules of thumb’ exist?

They exist to provide broad guidelines to the biggest audience possible. They have nothing to do with you personally.

If the consequences of blindly following rules of thumb like this weren’t so costly and dangerous, I’d settle for just saying they’re silly.

But, the stakes are just too high.

The question to ask yourself is ‘am I willing to bet my financial future on a broad ‘rule of thumb’ created for the masses’?

Before you answer, think about this. If you have a serious medical condition, potentially life threatening, would you base your actions on what is presented as a good ‘rule of thumb’ in medical publications?

Or, would you prefer to have a prescription designed for you personally after a series of tests and evaluations?

I would wager a lot of money that it’s the latter for you.

Why It’s Different in Retirement

As you’ve heard me say more than once, when you’ve reached the stage in life you’re experiencing right now (when you’re dependent on the money you’ve saved to support your lifestyle as opposed to working), your overall “strategy” has to drastically change because the stakes are so high now if you fail.

Although it would certainly be more convenient if there was ‘one’ answer to “THE” right allocation question in retirement, there simply is not.

How Dependent Are You?

Let’s take a look at two couples, both age 65. For round numbers sake, let’s assume that each couple has $2 million dollars in investments, the same social security retirement income, and the same pensions.

Jim and Sandy Independent have no mortgage or home equity line of credit, and have recently completed many of the major upgrades to their home, i.e. a new roof, vinyl siding, a new furnace, and new bathrooms. They have always lived a very modest lifestyle with little or no debt.

Ron and Rose Reactionary still have $300,000 outstanding on a second mortgage they took out to pay for their kids’ college tuitions and weddings, and a condo down in Florida they bought a few years back. They both drive high end cars. And, while their home is very nice, after 26 years, it’s starting to look “tired” and could use some upgrades.

What’s the Difference?

The difference in this example is what it costs each couple to support their lifestyle.

The income that will be required by Ron and Rose to support their desired lifestyle will be much greater than for Jim and Sandy.

Consequently, Ron and Rose will need to withdraw a much bigger amount each year from their Retirement Bucket than Jim and Sandy.

In short, even before looking at anything else, it’s clear that Ron and Rose Reactionary are much more dependent on their Retirement Bucket than Jim and Sandy Independent.

Without knowing anything else, if the both couples have the same amount of money in their Retirement Bucket, but Ron and Rose need to withdraw much more each month than Jim and Sandy, doesn’t Ron and Rose’s Retirement Bucket need to grow faster to support these greater withdrawals?

Don’t they require a greater investment rate of return than Jim and Sandy in order to avoid running out of money?

Of course.

Following that same train of thought, if they require a higher investment rate of return, shouldn’t they allocate their investments where they have a better chance of achieving that higher rate of return?


If that’s true, then how can they use the 100 minus their age rule of thumb as a guideline for investing?

The obvious answer is they can’t. It would be foolish.

This rule of thumb can’t possibly be appropriate for Jim and Sandy AND Ron and Rose.

Their level of dependence on their Retirement Bucket is so drastically different for that to be possible.

What I’d like you to take away from this week’s Strategy is an understanding that, while it might appear so much simpler and require much less work on your part to just follow basic rules of thumb” like this put out there for the masses, relying on them in your own situation can be dangerously simplistic.

It would be nice if The” solution was that simple. It would make our work together that much easier.

However, after 25 years of working hands-on helping our Relaxing Retirement members seamlessly transition to retirement, I can assure you that it never is.

Next week, we’re going to begin building The Relaxing Retirement Formula™, i.e. “the missing structure” you need to develop unstoppable financial confidence during this critical stage in your life.

Committed To Your Relaxing Retirement,

Jack Phelps

The Retirement Coach

P.S.: WHO do you know who could benefit from receiving my Retirement Coach “Strategy of the Week”? Please simply provide their name and email address to us at info@TheRetirementCoach.com. Or they can subscribe at www.TheRetirementCoach.com.

I appreciate the trust you place in me. Thank you!

(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)