Blog: Retirement Planning Rules of Thumb

Blog: Retirement Planning Rules of Thumb

Are you planning your retirement using the common “Rule of Thumb”?

By Joyce Libby, CFP®
June 2016

As a long-time educator of 401(k) participants, I tend to hear many rules of thumb ... “I’m saving 10% of my income—is that enough?”, “Should I use 70% of my current income as my retirement income goal?”, “Social Security is my retirement plan!”, or “I’m retiring in 5 years, so I’m using the stable value fund or the money market fund in my 401(k), I don’t need your help.”

I tell my own personal story in nearly every presentation I make to retirement plan participants. I recall my first full time job as an executive secretary for a financial institution. Just as I was about to  become eligible at age 21 to participate in my company 401(k) plan, my rather tall and very intimidating boss, who handled collecting on past due loans, came to me with my 401(k) enrollment paperwork stating that I should contribute 10% of my income. Nervously, I completed the forms, and yes I contributed 10%. I was doing the right thing!  I was well on my way to funding my retirement.

The Department of Labor (DOL) would have had a field day with that comment/requirement from my boss; however, this was 1991. This was also the time of the dot-com rave. From 1996 to 2000 the NASDAQ stock index exploded from 600 to 5,000 points! Yet my 401(k) account was going nowhere fast!  You remember, 1994 and America Online (AOL). “You’ve got mail!” Ok, how about, the first online book retailer!  The Yahoo! Search engine in 1994 was the online directory of websites! Even the S&P 500 was having 20% and 30% returns. What was I doing wrong?

After all, I contributed 10% of my income, it was the “Rule of Thumb”! Well, no one clued me in on how to allocate the investments! I recall the nice glossy enrollment booklet with all the investment options and the one page where you select the percentage to allocate to various investment vehicles. I did receive input from the nice secretary that sat next to me, after all, she knew what she was doing; she was just a few years away from retiring. She had a lot of experience! Needless to say, I missed out on the time when I should have been most aggressive. Instead I was in a very conservative allocation fit for someone retiring. Thank goodness I figured that out by the peak in 1999! My allocation changed from a very conservative 40% in stocks to a very aggressive 100% in stocks. During this time, it was said that a new millionaire was created every 60 seconds in the Silicon Valley. Yes, just in time for the “Tech Bubble”, I too participated in the 75% loss the NASDAQ saw by mid-2001 when it abruptlydropped to 1,300 points!

Many of you know this story all too well with the recent financial crisis still looming in our every thought. Think back to 2009 when you opened your 401(k) statement to find your stocks down nearly 40%. If you are planning your retirement based on the all too common “Rules of Thumb”, be cautious! Seek the help of a professional to work with you! Risk may hold you back from investing in the stock market, but the risk of outliving your money should also be considered. With Certificates of Deposit paying less than 1% and the ten year treasury yield well under 2%, it’s nearly impossible to keep pace with inflation.

Another devastating yet very common “Rule of Thumb”, take a 4% annual withdrawal on your portfolio and it will last 30 years. This approach has been studied by many analysts and is being recommended by many advisors. But what do you do when 4% is not enough? Portfolio allocation and ongoing planning of the withdrawals is still important.  Don’t take a “set it and forget it” approach.

The term “Rule of Thumb”, is said to have originated with carpenters who used the length of the tip of their thumb to measure instead of a ruler. A “Rule of Thumb” is a rough guide. While not necessarily wrong, they often are inadequate. To maximize your retirement planning, a more thought out approach is really needed. The details skipped in “Rule of Thumb” planning are too important to ignore.

We may not be able to call the next crisis ahead, but proper asset allocation can help you to withstand market fluctuations. Along with Steve Maher in our firm, EHD Advisory, we are providing workshops to help individuals better prepare for retirement. Feel free to email me at or Steve Maher at if you would like information on future workshops.

If you are a company owner or decision maker and would like us to conduct a workshop for your employees, we are happy to provide references from company owners that keep us coming back!

One last story, not quite a “Rule of Thumb” but interesting. A participant in a 401(k) plan had 100% of his 401(k) invested in international stocks!  When asked why he chose all international, he stated, “Well, I drive trucks for a living and when I see a lot of trucks on the road I go heavy international, when the trucks get lean, I go bonds”. Making this type of change to your portfolio at the wrong time could be very detrimental to your retirement plan, and is akin to chasing performance by moving your allocation to last year’s or even last quarter’s high performing funds. In most cases you missed the high and the market may already be moving in another direction. A better plan would be a well-diversified portfolio based upon your unique needs. A portfolio that changes as your needs change, not as the market hype changes.

Remember, be cautious with using “Rules of Thumb” as your only guide and think twice when asking the employee sitting next to you how to allocate your 401(k) as it could be one of the biggest mistakes you make. Take it from me, I can state that from experience! Hopefully my story will make you more comfortable in sharing your story. At EHD Advisory, “Your Future. Our Commitment.”

Securities offered through LPL Financial, Member FINRA/SIPC.  Advisory Services offered through EHD Advisory Services, a Registered Investment Advisor. EHD Advisory Services and LPL Financial are separate and non-affiliated companies.