If you’ve done any modicum of internet research or bookstore reading on retirement and savings, you’ve no doubt heard them. “Budget for 70% of your current income at retirement.” “Have 10x your income by age 67.” Use the “multiply by 25 rule.” Aim for the “4% rule.” They’re pervasive, and they’re all awful and lazy.
Have 10x my income by age 67? Which income? The income I have at 28 when I’m still working my way up a career ladder or building my business? Will that be enough? Or the income I have at 50 when I’m making more than I ever have before? Maybe that seems like an unattainable goal; is it necessary? Or the income I have at 64 when I’ve started winding my work obligations down? Income-based “goals” are useless.
The “multiply by 25” and the “4% rule” get closer to something that make sense (but, spoiler alert, they still suck). Essentially, they’re built to estimate how much money you will need in your retirement nest egg, assuming you’ll live about 25 years in retirement. Or, from the perspective of the 4% rule, withdraw 4% of your portfolio each year, and your savings should last 25-30 years.
Again, these rules ignore so many variables as to render them useless. At what age will I actually retire? What if my parents and grandparents have all lived past 95, so maybe I will too?
But most importantly, what will I DO during my retirement, and how much is that going to cost? THAT is really where these questions need to start. But the online retirement “calculators” never do.
Morningstar (which I love, by the way. I use Morningstar regularly for investing advice, market analyses, and stock / mutual fund research) has created its own take on the 4% rule. They’ve been tracking their own “conservative approach” since 2021. Not surprisingly (at all), withdrawing less money (3.3-3.6%) each year meant the money was more likely to last the full 30 years than the 4% approach. I mean, yeah, you take less out of it, it will last longer. But, again, does anyone care what we actually need in order to live the retirement life we want?
We need to build the retirement house from the foundation up. What do I want to do in retirement? What will my life look like? When we start to paint that picture, then we can estimate what that retirement lifestyle will cost. When we know what it’s going to cost, then we can start to have the conversation about how much we need, how long it will last, how to structure the savings and investments, and how to plan for the withdrawals and spending. Live Great Days is building those tools.