Are These Rules Full Of Bull?

The retirement world is full of retirement rules. Are these rules legit or full of bull?

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Transcript Of Today's Show:

Marc Killian: What's going on, everybody. Welcome in to another edition of the podcast Plan with the Tax Man. I'm your cohost Marc Killian alongside Tony Mauro. What is going on? Tony, how are you buddy?

 

Tony Mauro: I am fantastic. Getting ready to head into fall here. So, everything is good.

 

Marc Killian: Yes. Labor day weekend is upon us. So this is coming out a few days before labor day. So happy. Let me, what was the old Chris Berman thing on ESPN? Let me be the first to wish you a happy labor day. So I'll recycle that for Chris. Got any plans for labor day bud?

 

Tony Mauro: For us it's pretty low key. If the weather's good, play some golf and just relax.

 

Marc Killian: Okay, nothing wrong with that.

 

Tony Mauro: Yeah.

 

Marc Killian: It's a day off from labor.

 

Tony Mauro: It's a day off from labor. Yeah. And so I always tell my wife that too, I don't want to do anything around the house.

 

Marc Killian: Right. Hey, let's do this, this and wait a minute, wait, Hey, it's a day off from labor. So yeah, we finally got our deck done. My wife and I about a week or so ago, so we plan on, if the weather cooperates, which it should, being in the pool a little bit, hanging out on the deck, maybe having some burgers or something on the grill, keeping it pretty simple. So we hope all of our listeners enjoy their labor day as well.

 

Marc Killian: Don't forget to subscribe to the show on yourplanningpros.com. That is yourplanningpros.com, that's Tony's website. Just click on the podcast. You can listen to past episodes. You can get notified about future ones simply by subscribing. And you'll just get notifications when they come out. And we're going to have a fun episode this week. We're going to talk about some rules of thumb, Tony. So I want to know if these things are legit or full of it. Full of bull, if you will, I'll just leave out the other parts. All right. So let's dive into this, the 10% rule, maybe folks have heard this going through your life, right? He's like, "Oh, just save 10%." That's the 10% rule, right. Am I correct on that?

 

Tony Mauro: That is, yes. Save 10% of your income and you'll be set for it [crosstalk 00:01:50].

 

Marc Killian: And all will be fine. Yeah. How do you feel about that? What's your thoughts on that?

 

Tony Mauro: Well, my thoughts on all of these because we're going to go over a lot of numbers here and me being a numbers guy, I have to preface it with the traditional accountant disclosure. But I do think there's both sides to a lot of these, but I'll give you my two cents worth on where I feel. But there could be some arguments as, if I think something's bull or it's legit where someone else is going to maybe disagree and they may have valid points there. But the 10% rule, so I'll try to explain both, I think for the most part, it is legitimate, but I think it depends a lot on when you start that.

 

Marc Killian: When you start, yeah.

 

Tony Mauro: If you're 20 years old and you can do 10% of your income and you can do that for 50 years and you're set, you will be fine, unless you really mismanaged the heck out of it. Now take the same person starts out when they're 50 or 55, you're not going to be anywhere close depending on what your goals are. So one for you and your advisor to probably discuss. And because that number depending on when you start may need to be more than 10%, but that's a general good rule.

 

Marc Killian: Okay. All right. Because then again a lot of that depends on when you actually started it. How about the 4% rule? Now we hear about this all the time. We've talked about it numerous times. I think this is a late eighties, early nineties rule if I'm not mistaken, what is it? And is it legit or full of it?

 

Tony Mauro: So the 4% rule really originated with advisors saying, "Well you can basically safely withdraw 4% of your investment portfolio when you're retired and you should never run out of money." And I'm going to say right now, I'm leaning more towards the bull on that one only because that back in the day the 4% rule did work and it still can work today. I think even the 5% rule can work. But again, it depends on really what you're invested in and how much your nest egg starts out with. The problem with the 4% rule is on the safe side of the line, which I always call that's FDIC insured, your CDs, your savings accounts, things like that, all retirees and everybody knows those don't pay anything now. And so that would never work if you want to stay on that side of the line.

 

Tony Mauro: If you want to cross over and get into some more traditional types of income paying investments, you certainly could do the 4% rule and make it work. It's just that in some years, when the market isn't earning 4% or even going backwards, your principal will go down a little bit and you've got to be prepared for that to make that work. So, but 4% I think is a conservative figure. It's still used today. I use it a lot and we try to go for five depending on what the client can tolerate for risk, but-

 

Marc Killian: And it is a kind of a rule of thumb as well.

 

Tony Mauro: It's a rule of thumb yeah.

 

Marc Killian: So these first couple of ones we've done are definitely rules of thumb. And I think this next one, I'm not too familiar with this, but what do you think about the 25x Rule? What is that?

 

Tony Mauro: 25x Rule is basically you take your annual income, you multiply it by 25 and that's the nest egg you're shooting for in retirement. And I like that as again, just as a general ballpark, because for example, you make a hundred thousand dollars times 25, that's 2.5 million. If you take that 2.5 million, assuming that you can get that and you use the 4% rule, it's about a hundred thousand a year before taxes. You're right where you were when you were making a salary. So that's not a bad thing. I think the drawbacks to that is, well, what if I want more than that obviously then that that number becomes larger. And then for some but not many, they certainly could survive on less. But I think again, if you're starting out young, if you just got that big picture view, that's not a bad thing to at least start out as a goal. Obviously it's going to need to be adjusted, but I like that.

 

Marc Killian: All right. So that was a 25x Rule. So 25, multiply your annual income by 25 to see how much you might need. Okay, the 80% rule, we've talked about this before in the past, on the show. This is basically that rule of thumb that you'll need about 80% of what you were making when you were working in retirement. And some of these rules, clearly, if you [inaudible 00:06:20] and say, "Well, some of these sound contradictory." And again, that's why they're rules of thumb, right?

 

Tony Mauro: Right.

 

Marc Killian: What do you think on the 80%?

 

Tony Mauro: Well, the 80% rule I tell you I don't say it's bull, but I'm going to lean that way. I take it back, I am going to say it's bull. I think that all my retirees say that they're spending as much or more-

 

Marc Killian: Or more, yeah, exactly.

 

Tony Mauro: Than they did pre-retirement. Now it may not all be on fun and glamor. Some of it is, they have some health problems, their insurance is higher. They're traveling more, that's a little bit of fun and glam, but their needs don't seem to go down. And of course, prices last time I looked, never go down. Everything goes up. So you could get that done, but that is going to be hard to do. And I wouldn't shoot for that, my client's portfolios or in their overall picture, I'm shooting for a hundred percent.

 

Marc Killian: Yeah, no I'm with you on that. And the Gogo years, as they say, we spend more in retirement early on those for those first few years, pre COVID anyway, and hopefully post COVID. But at some point we want to get out and do things and have a good time. And then the medical side may be starts to catch up. So yeah, I'm with you. I don't think the 80%'s a good way to go on that. Now those are generally rules of thumb. Now I've heard other advisors say these next couple I've got for you Tony, are more mathematical and they're not really rules of thumb and that these actually have a bit more legitimacy to them, but I'm going to see what you think. The rule of 72, what is it and what's your thoughts?

 

Tony Mauro: So the rule of 72 is basically a, I don't know how this came about, but it's been around for a long time and it is legitimate. It's basically saying that your money doubles every, depending on how much you earn. So it's the rule of 72. So let's say you're earning 8% on your money. You basically take your earnings or the rate of return divide it by 72 and that's how long it takes your money to double. So in this case, I made an easy example, your money should double every nine years.

 

Marc Killian: Okay.

 

Tony Mauro: And the key word is should.

 

Marc Killian: Should, right.

 

Tony Mauro: Because the only way that that's going to work is if that 8% is consistent or unlike the stock market some years you're not going to get that, some years you're going to get more than that. So that's kind of an average. In the old days, basically say, "Well, if the market's longterm rate of return is 10%, my money's going to double every 7.2 years." But again, that's over long periods of time. If you take 2000 through 2010, for example, that your money didn't double in those seven years, it was a weird time, right? So that's got to be over longer periods of time. But I do like that rule and I still use it in my head very quickly with clients, even if we're doing the 4%, 5% withdrawal rate, how long is our money going to take to possibly double using more conservative figures? So it's a good one.

 

Marc Killian: Okay. All right. And that's the rule of 72. Now this one is the rule of 2.67, and I'm guessing this is inflation based. You tell me.

 

Tony Mauro: It is inflation based, yeah. It really is basically taking your income and basically adjusting it or multiplying it by 2.67 to get your adjusted dollars it's going to take for the same amount of living 20, 25 years in the future. And our inflation rates, hovering between 2 and 3%, I think that that's legitimate. Most advisors are going to tell you it and like us, they're going to use inflation adjusted dollars because things do go up and a 100,000 today is not going to be quite worth a $100,000 30 years from now. You're still going to have that 100,000, it's just not going to buy as much. So you've got to take that into account.

 

Marc Killian: Okay. Yeah. And so a lot of these, and for folks listening, we're talking about rules of thumb or financial rules and are they legitimate? Are they just full of it? Do they have some merit? And in some of these, again, if you use them as a quick get started math in your head, they're not too bad, but some of these are definitely not something you want to hang your hat on. And this last one gets a lot of attention. And again, I feel like this one to me, has turned into more of a rule of thumb than an actual good guideline. I mean, it's great for quick math, but it's the rule of a hundred. Tell us what it is and what's your thoughts on it.

 

Tony Mauro: So the rule of a hundred generally is you take a hundred minus your age, and that's your percentage that you should have invested in the stock market.

 

Marc Killian: So if you're 60, right, you have 40% at risk?

 

Tony Mauro: At risk in the market. And again, big picture general rule of thumb. That's not a bad way to go. Just kind of-

 

Marc Killian: Just quick dirty math, right?

 

Tony Mauro: Yeah. Quick math. However, and we have many 60 year olds and we advocate having more than 40% of your nest egg in the market, it may be conservatively invested in the market. It may not be in global type of investments or tech stocks. But I think for most people you got to have a little more exposure to the market rates of returns because the alternatives aren't very good as far as rates of return. So again, I think this with all of these, as you said, Mark, you really need to talk to your advisor about, because this is a good starting point. This is just some fun little trivia here we're going through, but you really need to hone it in that fits your situation based on whatever goals you guys decide on, because and you can use these as little quick benchmarks.

 

Marc Killian: Exactly.

 

Tony Mauro: But by no means, this should be the cornerstone of your financial plan.

 

Marc Killian: Right. And like anything, right? Anything you hear in our show or any other type of financial show, you always want to check that information based upon your specific situation with your advisor. If you're working with one, great. If you're not reach out to Tony, let him know, he'll be happy to help you. But the idea is that a lot of folks do hear these. So for example, the rule of a hundred, right? We were just talking about that. If you're sitting there thinking about maybe target date funds in a way that's how they work, right? That's the idea, as you get closer to that date for retirement, it's supposed to be kicking you down in terms of less risk each year you get closer.

 

Tony Mauro: That's exactly it. And that's what target funds are set out to do. And I think with the rule of 100, again, if you're just sitting there by yourself and wondering, well, how much money based on my age should I theoretically have in the market? And that's a good starting point now. If you're 40 years old and you have a hundred percent of your money in let's say I always pick on CDs, but that's probably not going to get you to where you're going longterm, but maybe your appetite for risk is just so conservative that you just don't feel comfortable with anything, is that wrong? No, as long as you know where that's going to get you.

 

Marc Killian: Yeah. And to that point with the rule of a hundred, if you're 40, you may feel comfortable taking more risks than that general rule would say, it would say, okay, well, 60% is what you should have at risk in the market. And that's pretty high. It might be considered high to some folks, but you may need to do more than that to get to your goals. But again, you have to talk with your advisor on that to make sure that you're on the same page with what those goals are and how to best achieve those.

 

Marc Killian: All right. Well, that was kind of a fun one, something simple, short and sweet and have a little fun with some of these rules of thumb and just kind of general things. So if you've got questions about anything we talked about on today's show, you want to talk, you want to say, "Hey, this rule of 72, how can I apply that?" Or whatever the case might be, or you just need a little bit of help with your financial plan, reach out to Tony about taxes as well because they're Tax Doctor Inc. So give them a jingle at (844) 707-7381. That's the number you call (844) 707-7381 for Des Moines professional alternative at Tax Doctor Inc. serving you here in the central Iowa area. Don't forget to hit the subscribe button for Plan with the Tax Man podcast on whatever app you use, Apple, Google, Spotify, whatever the case might be. You can find it all at Tony's website, yourplanningpros.com as well as a lot of good tools, tips and resources at yourplanningpros.com.

 

Marc Killian: All right, my friend, I'm going to let you go so you can get ready to enjoy, this is a Thursday here we're dropping this podcast. So the labor day weekend is upon us. Have yourself a great time, be safe and sane and I'll see you soon.

 

Tony Mauro: All right, sounds good. Take care.

 

Marc Killian: Take care folks. And we'll talk to you a little bit later here on Plan with the Tax Man with Tony Mauro.