When it comes to retirement planning there are certainly plenty of ‘rules of thumb’ that can be used and followed to plan, and reach, any retirement goal the reason that they work so well is basically because they are relatively accurate and, when an off-the-cuff measurement is needed, quite helpful. Today we have several rules of thumb that were going to share with you that should be quite helpful and make your retirement planning a tad easier. Enjoy.
We’ve talked about this one before but having six months’ worth of income on hand as an emergency fund is really a necessity. In fact, many experts believe that a year’s worth of liquid funds is necessary, especially if you are a high earner. This isn’t exactly a retirement rule of thumb but, since it will greatly reduce the chance of bankruptcy should you suffer a temporary loss of income, it definitely can be helpful to your retirement plans. Besides that, having enough money on hand to weather emergencies means that, during those emergencies, there’s less likelihood that you will be forced to stop saving, take money out of one of your retirement plans or waste lots of money due to high interest debt. Make sure to put this emergency money into a high interest savings account or a CD ladder so that it makes at least a little bit of income while it’s sitting there.
Another excellent rule of thumb is to save at least 10% of your income for retirement. Frankly, this has been increased by many experts to 20% given the fact that Social Security probably won’t be around for too many more years. The fact is, saving at least 10% or more to a 401(k) or an IRA every year is one of the best ways to make sure that, when not retirement day finally arrives, you have plenty of money in savings, investments and so forth to retire relatively comfortably.
Of course if you start doing this in your 30s, 40s or even 50s you’re going to need to put quite a bit more than 10% aside because a) you’re going to need it and because b) the power of compound interest will not help you nearly as much as if you are able to start in your 20s.
This rule of thumb is simple to follow; the percentage of bonds that you have in your portfolio should be equal to your age at any time. The reason for this is that having money and less risky investments (like bonds) will protect you should the market crash. If you are younger the likelihood of bouncing back is much greater than if you are 40 or older so investing in stocks more than bonds is a better idea.
One rule of thumb as far as expectations are concerned is that you can expect to get back an average of 7 to 8% from a stock portfolio that’s domestic and diversified. This is the stock market were talking about however and as such there are no guarantees. Depending on where you put your investments, how diversified your portfolio is and of course how the economy is, you could well make a bit more or less than this in any year so best to plan accordingly.
A rule of thumb that many financial advisors like is that of replacing 70 to 80% of your pre-retirement income during your retirement. As with most of these rules of thumb, this may work out well for you or it may not. For example, if you have a spouse with a serious medical condition you may wish to replace even more of your pre-retirement income. On the other hand, there has been one study done that says that, on average, most people will only need 35% of their preretirement income during retirement.
This rule of thumb is quite important; save 8 times your final year’s income for retirement. For example, if you plan to retire at 65 you will need to have at least eight times the amount that you make that year in a retirement plan. (Using an online calculator to determine what that amount should be is helpful.) what’s great about this rule of thumb is that it can help you to set and meet goals throughout your career. For example, saving 1 times your yearly income when you’re 35, 3 times by the time you reach 45 and 5 times once you are 55. It also helps if you have a good solid bank with customer friendly service and good rates.
Again keep in mind that these are only rules of thumb and, if your situation calls for something different, you’ll need to increase or decrease some of the numbers that we used and tweak some of the rules for your own use. If you have any questions about financial planning, retirement planning or anything else to do with finances please let us know and we’ll be sure to get back to you with answers and options ASAP.