Retirement Rules of Thumb

Welcome in to Mr. Stillman's Opus. I know we've had a little hiatus, Jon, but I'm just glad to be back on with you. A little hiatus?

It's been like a year, at least. Yeah, I guess it depends on when you're listening to this. It might be two years since you've last heard a Jon Stillman podcast. Well, it's also possible it's a podcast, right? So they could've listened last week.

Who knows? Yes, that's awesome. Maybe it's not a hiatus for you. No matter when you're listening. Glad to have you on the show today, talk about some rules of thumb. But I mean, a little time off. I mean, it's not like you haven't been working though, right? I mean, things have been pretty busy, staying pretty constant with things, but just had to put the podcasts off to the side for just a little bit. Yeah, sometimes some other things take priority.

Well, we're glad to be back with you. And we're talking about rules of thumb today. I'm assuming, Jon, you're not a guy that sticks to the rules all the time, right? What would possibly make you say that? I've gotten to know you over the last few years.

Oh, that's what it was. There are some a lot of rules of thumb, though, in finance. And I know when you're building a financial plan with your clients, you know, it's all about customization and making sure that you put them in the position that fits them the best. So rules of thumb, while they're great, I guess, in general, right? Maybe it's getting maybe a starting point for a lot of people. They don't always necessarily apply to everyone you meet with. Well, no. And I think that's the thing that a lot of people get confused about is they'll hear some of these rules of thumb on TV or see it in Money magazine or something, and they think that applies to them.

Well, it might, but it also very well might not. Well, we'll try to explain that today and give you a little guidance on whether or not these rules of thumb that you probably have heard of and that sound like they make a lot of sense for the most part, why you maybe shouldn't be following these as we go. Reminder, you can always find everything you need online at rosewoodwealthmanagement.com.

You can schedule a time to meet with Jon there as well. Let's jump into these rules, Jon. I'm going to start with the rule of one hundred. Now, this is the rule that helps you decide and determine how much risk you should have in your portfolio. You take the number one hundred, you subtract your age and boom, it spits out the risk you need. That's got to be accurate, right?

So this is a fine place to start a conversation. So let's put some actual numbers on it. Ben, you are forty one forty one. OK, so one hundred minus forty one would be fifty nine. That tells us that fifteen, according to the rule of one hundred, fifty nine percent of your investments should be at risk in the market and forty one percent should be somewhere less volatile. Honestly, the rule of one hundred really doesn't apply at your age.

For you at age forty one, you should still pretty much be all in the market over and above your emergency fund and all that stuff that you need to have in the bank from an investment standpoint, you really should be all in the market. So I would say the rule of one hundred doesn't really even apply until you're at least in your mid to late fifties. So that's one caveat on the rule of one hundred. Over and above that, it really is just a place for a conversation starter. Let's suppose you're sixty years old and you say one hundred minus sixty gives me forty. That means I should have forty percent of my portfolio at risk and sixty percent in a safer place. Well, maybe that's a fine place to start a conversation.

So if you say I'm sixty and I have ninety eight percent of my money at risk in the market and two percent in a less volatile place. Well, all right. Maybe this raises an alarm bell for you. Do you raise an alarm bell? Sounds often alarm. It raises a flag. It sounds an alarm. OK, whatever alert system you're using, it should set off the alert system somehow.

Oh, you know what? Maybe I have too much risk. Maybe I need to take a look at this now. It doesn't automatically mean that you're wrong, but it at least means that it warrants a conversation. On the other hand, if you're fifty, one hundred minus fifty is fifty. So fifty in the market at risk, fifty in a safer place. And you say, well, you know, I have all every penny I have is in savings or money market at the bank. OK, well, this is a good sign that you're not taking enough risk as the rule of one hundred would help you figure out.

So find place to start a conversation. It's not actual retirement planning. We can't just say, OK, well, you're sixty three, so we only want thirty seven percent of your money in the market.

Come on, guys, we can do a little better than that from a sophisticated financial planning perspective. But it's a fine place to get some perspective on where you stand. OK, great starting point. Always one or two like when you say that number in the market, does that are you just specifically talking about equities that we're talking about when you're talking about being invested in the market? Yeah. So, you know, following the overall indexes in general, the Dow, the S&P, the Nasdaq, stuff like that.

OK, so not necessarily Bitcoin, because that's not that is a whole different scale, brother. OK, just checking it out. All right. Seventy five percent rule. So this one's good because we're trying to figure out how much income you're going to need. Right. So the rules say it's a way once you retire, you need about seventy five percent as much income as you need while you're working.

So, again, I'm guessing this is not just a plug and play. You've got to do a few more calculations. Yeah. And part of the thing about this rule that's not clear is are we talking about gross income? You'll need seventy five percent of that. Are we talking about you're going to spend seventy five percent as much once you're retired than you spent while you were working? I would say for most people, that's not particularly accurate. I think a lot of people say, well, yeah, when we retire, we could we could get by on, you know, some lesser amount than they spend while they're working.

But realistically, can you actually do that? And the second question is, would you want to do you want to retire just so you can sit around the house and never spend any money on anything? So I would say for the overwhelming majority of people, they're going to end up spending pretty close to what they spent when they were working. Now, if you are saving a lot of money from your take home pay, meaning after you've already made your 401k contributions and all that, and let's say you have, pick a number, ten thousand dollars a month coming into your checking account through your paychecks on a monthly basis, but you don't spend all of it. Let's say you only spend seven thousand a month and you're investing three thousand dollars a month from your take home pay. Well, once you retire and you don't need to continue saving at that rate, then, yeah, you can live off less income as a retiree than you had when you were working because you were saving so much of your working income. Again, we're not talking about your 401k because that all happens before your paycheck hits your bank account. So much like the rule of 100, it's an okay place to start a conversation.

It's in no way something that you should plan your retirement around. Yeah, it seems like out of all the ones we're going to go through today, this is the one that you don't want to guess on, right? Like this is the one you want to really hammer in and try to get an exact answer as possible.

Yeah. I mean, we have a pretty easy way that we can hone in on this number with folks. You don't have to go through and add up all of your expenses and say, which of these am I still going to have in retirement?

Which am I not? And let me look at each line item in the budget. Now, you know, there's an easier way to do that. We can help you figure out what that number is. Like I said, for most people, it's not going to change a lot from your working income to your retirement need income, but there are exceptions in either direction. But the rule of 72. So this one's a bit of an exception to in terms of it's just math. So you really can't refute how this rule of 72 works necessarily.

But I guess what we need to explain is why is it useful? So the rule of 72 basically says you take the number 72 and divide it by your interest rate. And that tells us how long it's going to take your money to double. So let's put some math on that. Let's say you're getting 2% interest rate on a money market account then.

It would actually be pretty good in today's environment. So we'll say 72 divided by two is 36. That means it would take your money 36 years to double at that rate of 2% per year. On the other hand, if you were getting 10% return, well, 72 divided by 10%, a little over 7 years, 7.2 years is how long it would take your money to double. So it just gives you an idea if you're assuming a certain rate of growth, how quickly your money can grow. Now the thing that's deceptive about this is that it creates this mindset that you need your money to double.

Well, maybe you do, maybe you don't. If you're 35, you probably need your money to quintuple or sextuple by the time you reach retirement, both between your contributions and the growth on those contributions. If you're 63 and you're retiring next month, well, we don't necessarily need your money to double.

We just need your money to more than anything stay there for you to not go away. So at different stages in your life, you're going to have different priorities. And yeah, like you said, you can't really refute how the rule of 72 works. It's a fun little way to figure out how quick money is going to grow. But you just have to remember that at some point in your life, maximum growth should not be your goal. So don't get too sucked into thinking about how fast my money is growing. Yeah, to me, this just shows the importance of compounding. When you talk about a 2% return taking 36 years compared to a 10% return, and it is a pretty significant difference. But when you look at it on paper, that doesn't seem like a huge gap. But then you're talking about 25 years or a quarter of a lifetime for most people, even more. So that's a pretty remarkable difference. Yep.

Yeah. And it's a fun little way to look back at what interest rate have you gotten in certain accounts in past years. Now, I'm not talking about rate of growth in the market because that's not linear. You might make 37% one year and lose 20% the next year. It's not as productive to try to average those out and figure out your rate of growth. But if it's a fixed type of account where you're getting some kind of regular annual fixed interest, it's just an interesting way to look back and see, all right, well, how long is it going to take me to double this?

Well, one that I haven't heard a lot about, the rule five, which says on average, we experience a bear market every five years. So, I mean, is that accurate? Does that sound right to you? And why does this matter? Well, so this is accurate in the same sense that the old geography department chair at UNC always claimed that geography majors had a higher average salary than any other major at Carolina. And of course, the punchline of the joke is because Michael Jordan was a geography major.

Right? So that's been said for years. It doesn't actually tell us anything about what geography majors actually make compared to other majors. And this is kind of the same, where it's like, yeah, you could say on average, we have a bear market every five years, but it is in no way every five years like clockwork. I mean, think about the run we had from, well, 2009, really, after we recovered from the steep drawdown of 2008. So spring of 2009, we were essentially at that bottom and the market just roared ahead until the beginning of the pandemic. So that was a more than 10-year run, which tells us on average, we're going to have bear markets much closer together at some point to cancel out that longer run. So you just can't sit around and assume, all right, well, about every five years, we're due for one, we're due for a downturn. No, you might have another couple of good years in you. Or you can say, well, we just had a bad downturn a couple of years ago.

We're not going to have one again this soon. You just don't know is the point. Yeah, no question. Stay invested. It was a long-term perspective that you want to keep in mind.

Rule of 10. This one I'm really curious your thoughts on because we all kind of look for benchmarks to see how we're trending. Are we keeping up with where we need to be? Where should I be when I get to retirement? How much should I have saved? Well, the rule of 10 says 10 times your salary you should have saved for retirement by the age of 67.

So seems very subjective. Again, an okay place to start a conversation, not something you can actually plan your retirement around. The flaw with this is it assumes that everybody is going to have roughly the same retirement spending needs in terms of how much money they need from their portfolio.

You can assume, yeah, well, if everybody invested the same way and retired at roughly the same age, well, then yes, we could assume about how much they would need saved relative to their current spending habits or their past spending and earning. But the reality is some people are going to have fixed guaranteed income streams that they're just not going to spend over and above. Like as an example, I have quite a few clients who have social security for two spouses. Maybe one of them was a state employee for several years and they have a big pension and they're just not going to spend very much at all from their investments.

I have a multitude of clients that would fall into that boat. And so they might need one or two percent from their portfolio every year to supplement their social security and their pension, but they're really just not pulling very much out. So the amount that they would need to have saved in order to have the lifestyle that they want in retirement is substantially less than 10 times their salary. On the other hand, I have clients who are going to really ratchet up their lifestyle once they retire. Like one couple that comes to mind, they own their own business.

They work all the time. They never take a vacation. They never have the opportunity to spend money because they just work all the time. Well, once they retire, they're going to be traveling all the time and they're going to spend a lot more once they retire than they spend now in their late fifties while owning a business. So for them, they might need more like 15 or 17 times their salary saved for retirement because of the lifestyle they want to have. So yeah, again, a fine place to start a conversation from the standpoint of if you make $100,000 a year and you have $100,000 saved for retirement, you're probably not ready to retire. Now, even having said that, there could be exceptions, but we can in general say that you're probably not in great shape. But if you make $50,000 a year and you have $3 million saved for retirement, you're probably in pretty good shape. Everything in between those two examples I just gave probably needs a conversation.

Fair enough. My last one I got for you to take us through is the 4% rule, which is probably one that many people have heard about. You can take out 4% of your portfolio each year without running out of money.

Probably a good starting point, I guess, I'm assuming? How would you guess? Yeah, I mean, again, let's put numbers on it. You have a million dollars saved. That means you could take out, according to this 4% rule, $40,000 a year without, I don't want to say with no risk of running out of money, but it's a very low risk of ever running out of money if that was your withdrawal rate. So on one hand, if we say, well, somebody who's been able to save a million dollars, they're going to need more than $40,000 a year to live on in retirement. Well, yes, but keep in mind, this is only the money coming off of your investments.

This doesn't factor in your social security and pensions and things like that. Rental income for some folks. I have a lot of clients or at least a handful of clients who have sold a business and they're being bought out over the course of years. So like as an example, a dentist retires, sells his practice and he's getting paid out. He essentially did an owner financing deal. And so he's getting paid for 10 years.

His first 10 years of retirement, he's being paid back for the sale of that practice. He's not going to touch any of his investments from age 62 to 72 while he collects on the sale of the business. So he's not going to need to take any drawdown on his investments.

So again, it's just a case by case thing. 4% is a little bit risky from the standpoint of we go into retirement and you're taking 4% off of your investments every year and we have really bad stock markets in the first couple of years of retirement. Well, now you're taking 4% off what is a dwindling portfolio as the market is crashing and you're taking money out, which means you're selling stuff on sale in order to create your income, in order to generate that 4% cash flow. And so then those shares of whatever it is you're invested in aren't there to recover when the market comes back and you can see how that creates a problem. So a lot of this is determined by what the market does your first couple of years of retirement.

And since you can't predict what's going to happen with the market the first couple of years of retirement, you need to be prepared for either outcome. Well, bottom line is be prepared and the best way to do that is through planning these rules of thumb while maybe a great place to start and just to kind of begin the conversation. There are by no means the end of the conversation. So you want to start that begin with rosewoodwealthmanagement.com. That is the website to get in touch with John schedule meeting there and then of course John will explain these rules in much more detail and really get you into the spot you need to be. So John good stuff as always. I'm just glad to be back on with you. I'm glad to get the podcast cranking again. Yeah, man. Good to talk with you. We'll do it again.

We won't wait a year this time. Okay, the next one fair enough. Well, thank you for listening. Mr. Stillman's Opus for John Stillman over at Rosewood wealth. I've been George will talk to you next time. Carolina wealth stores doing business as Rosewood wealth management is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.