Rules of thumb can be useful tools that allow us to simplify and clarify our daily lives. Some swear by certain rules and use them as guiding principles. Often these rules can be humorous anecdotes whose only purpose is to provide conversation fodder at a cocktail party (e.g. if the age of the person you want to date is less than half of your age plus seven, they are too young).
The world of personal finance and investing is full of some well-known rules. They range from the fairly obvious (buy low, sell high) to the surprisingly accurate (72 divided by your rate of interest tells you how many years it will take to double your money).
One rule that has survived multiple generations is that you should live off of your interest and never dip into your principal. This rule ensures solvency in retirement and a healthy nest egg for one’s heirs. Unfortunately, in today’s world following this rule will not provide the level of retirement income that most of us require.
Using the example of a 66-year old that has saved $400,000 for retirement we find that drawing the interest off of the average one-year CD plus Social Security will only provide $19,543 in income per year. Using rates from just ten years ago this same strategy would generate $36,023 annually.
In addition to the historically low-rate environment, other factors such as rising medical costs and longer life expectancies make retirement income planning more challenging than ever. In order to survive their golden years today’s retiree must branch out from the old rule of thumb and create a more strategic and complex retirement income plan……this is not your father’s retirement.