Lynn Hopewell, one of the pioneers of the financial planning profession, once said, “Rules of thumb are for people who want to decide things without thinking about them.” Chuck Jaffe (a columnist at MarketWatch) recently wrote an article titled, “Seven Rules of Thumb That Make Little Sense.” He was referring to the blanket advice that is often given to consumers, such as: subtract your age from 100 to determine the percentage of stock in your portfolio; plan on spending 75% of your current income during retirement; purchase five times your annual income in life insurance; save 10% of your income while you are working. I’m sure that we are all familiar with these and other rules of thumb and, hopefully, none of us use them in our practices.
There are, however, some “rules” that some advisors use in dealing with their clients that I may categorize as “rules of dumb” because they may dumb down our profession and, as Hopewell observed, may not require much thinking. Among some of these rules are:
A safe withdrawal rate is 4% of your portfolio improved by inflation each year.
While this rule has created many fine articles and discussions, it is our experience that it is extremely impractical to implement when one is planning for the future. To begin with, how does one calculate inflation? Do we use the CPI? Most of the research that I have seen does so.
via Rules Of Dumb.