Tell me if you’ve heard this, “The percentage of your portfolio invested in bonds should equal your age.” Or maybe you’ve heard, “Never withdraw more than 4 percent a year if you want your money to last through retirement.” Or how about, “Multiply your annual income by 25, and that’s how much you need before you can retire.” These three statements are popular rules of thumb.
A rule of thumb is a broad guide or principle, based on practical experience. Rules of thumb are not intended to be accurate for every person or situation. They are broad, overarching and do not take into account your specific situation. They aren’t about you, or for you specifically. By definition, a rule of thumb is imprecise.
Rules of thumb are meant to be easy, and easy to apply. And while easy is good in some things, it’s not always appropriate for you. When your future is on the line, and there are no take-backs or do-overs, wouldn’t you prefer accurate, precise, and based on your situation?
My husband and I live in a condo complex. While the buildings have different color siding, upper and lower units, they all look nearly identical. There is a family of three that lives behind us. We’ll call them the Smiths.
The Smiths unit is a mirror image of ours. Their address is one digit off from ours. Mr. and Mrs. Smith are close to our age. They even have a boy close to my son’s age. Heck, they even own a cat like us.
On the surface, it would seem that what works for the Smiths would work for us and vice versa. In some things, this might be true. We might like the same paint colors, or television programs. We might share a religion. We might even vote the same, and hold the same values. But considering retirement, we’re miles apart.
For one, the Smiths want a summer home here, and a winter home in the Florida Keys. They love to travel to exotic places with beautiful beaches, and plan to do it often. My husband and I want a condo in Arizona with trips to visit family. My husband doesn’t like to fly, so exotic locations for vacation are limited. We both could care less about going to the beach. I don’t like to swim, and my husband can’t swim.
For another, both of the Smiths work for a hospital. They have amazing health insurance, life insurance, and retirement savings plans through their employer. My husband is a small business owner; this means no company match or “benefits” package. And I work for a small business, which means expensive health care and outside life insurance we bought on our own. (I win in the retirement savings plan though, as you will probably agree!)
What works for our neighbors, no matter how “like us” they are, won’t work for my husband and me. Externally, we may look like our situations are similar. But when you get down to it, they aren’t. We want different things, and we have different challenges.
We need different retirement plans.
Let’s look at this another way. Let’s say you and your friend Sam wear the same size shoes. You dress similar, and have similar styles. Sam buys a pair of shoes he/she loves. Would you buy the same shoes without looking at them, without trying them on? They could be a color you hate, or a style you don’t like. They could be ugly. More importantly, what if you have Planters fasciitis and Sam doesn’t. Sam’s new pair of favorite shoes have no arch support, and after a day of wearing them you’re left limping and in pain. Sure it’s easy to buy someone else’s shoes, and you can get them on clearance for cheap, but wouldn’t it feel better to buy shoes that are comfortable for you? Wouldn’t your quality of life be better, if you could walk without pain?
I’d bet that you go buy your own shoes, finding ones that fit you. If you order from Zappos, I’d bet you return ones that aren’t comfortable. You should do the same with financial planning and retirement planning. Find a financial planner and investment advisor who fits you. Who you feel comfortable with, and trust. Once you do, work with them to create a personal financial plan, just for you.
A good financial plan, one crafted for you, will fit you. So well, in fact, that if it were shoes, you’d wonder if Grimm’s Shoemaker Elves made them just for you. Then, you’ll be able to walk for miles without pain, confident that even if the path gets bumpy, you can continue on. Pain-free and comfortable.