In life, it is natural for people to want certainty around various areas of their life. We don’t like surprises or change, so knowing the probable outcome of actions we may take gives us comfort. One way we do this is by using “rules of thumb” (ROT’s).
We see this happen in the financial advice world, but is this a good or bad thing for us to pay attention to? Below are a few ROT’s that we often come across when looking at retirement planning.
• Save 15% of your income from the day you start working until you retire.
• Draw 4% of your retirement capital.
• You need an income of 70% of your final salary to retire.
• Have capital equal to 22 times your final average salary.
• Have an equity holding in your retirement funds of 100 less your age (at age 50, have 50% allocation to stocks).
The biggest problem with using any of the above ROT’s when planning your retirement is that it assumes that everyone is the same and wants to live life in the same way. We only need to look at our children who come from the same parents and grew up in the same household to know that nothing is further from the truth.
While some of these ROT’s may be handy guidelines, they are just that, guidelines.
Imagine if a cardiac surgeon, instead of studying a particular patient’s medical history and diagnosing them specifically before operating, treated all his/her patients the same and followed the same procedure before closing them up?
I think a few lawsuits may follow.
If we wouldn’t treat our medical health in this way, why then would we accept this with our financial health? Each of us is different and has a different dream of how we want to live in retirement. If your adviser uses any of these ROT’s to “plan” the best years of your life, then perhaps you need to consider a change.
We each deserve to have the retirement we want to be diagnosed with and then get the advice/treatment which is specific to that diagnosis. This takes time and means that your adviser needs to know all about you, your past, your family and your future dreams and aspirations.
I know it sounds a bit warm and fluffy, but aren’t the best things in life?