Rewriting retirement rules of thumb

At the end of any retirement planning conversation, we should always end with how our plan is unique to our own situations. But at the beginning, during the exploratory stage, it’s helpful to have some basic guidelines for where we can begin, or how we can craft our own benchmarks.

In the same way that a baby may start to walk anywhere between 8 and 18 months, we all start saving and investing at different stages in life. For an 8-month-old, 18 months is more than double their age. So someone could start planning for retirement at 20, whilst others may only just be getting there at 45 - and that’s okay.

What’s important is that you start as soon as you realise that you need to prepare for life after work!

In a recent article on IOL, they spoke about two common rules of thumb:

The Rule of 120 is a calculation that uses your age to determine the supposedly appropriate asset allocation for your investments: The formula suggests subtracting your age from 120 to discover the percentage of equities you should hold. For many, this may make sense, given that the older you get, the lower your capacity to take on risk.

Then there is the 4% Rule. Since the mid-90s, this has been applied universally as a rule of thumb to determine the appropriate drawdown rate and asset allocation for retirees. It suggests that if you withdraw 4% of your capital in the first year of retirement and only adjust for inflation each year thereafter – and provided that you maintain a minimum 50% allocation to equities – the risk of outliving your retirement savings over a 30-year period is substantially reduced.

But this can feel very technical and detached for many who are unfamiliar with the financial lingo. Also - a notable flaw of rules of thumb is that they cannot account for everyone’s unique circumstances. This is why it’s the starting point, not the ending point. Sometimes, we don’t even bring them up at all.

Ideally, we want to spark and sustain conversations that build awareness that life is changing and these changes affect and impact our financial wellbeing. Traditionally, we’ve been told that retirement is a stage of life that will happen around our 60s and that it will be accompanied by a slowing down and cutting back of work and responsibilities. But this is no longer the case, and certainly won’t be the case in the decades to come. 

Whilst we still need to invest and plan, by changing our motivations and dreams of what life can look like in 10, 20 or 40 years is proving to be considerably more helpful for our mental health, our financial behaviours and our investment portfolios.