Ignore All the Financial Planning Rules

I always say that it’s about breaking the rules. But the secret of breaking rules in a way that works is understanding what the rules are in the first place.

-Rick Wakeman

General rules of thumb for
financial planning rarely work. 


Here are some with my critiques:

“Stocks minus your age should
equal 100” – Bad rule – your
investment allocation depends on your risk tolerance, the rate of return
required to achieve your goals, when you add to investments from annual savings
or stock option exercises and when you remove investments to fund lifestyle

“Life insurance must equal six
times compensation” – Bad rule
– your spouse or partner would use all of your resources, including insurance,
to fund lifestyle needs after you die. 
If you review this and determine a short-fall, that is the amount to be
funded by insurance.  It could be more or
less than the six-fold multiple but ensures that your survivors have adequate
resources to be protected. 

“Save 10% of income annually” – Decent rule – however, some may
need to save even more and others may have no savings need.  As with life insurance, the question is
whether the return from assets plus annual savings over your life expectancy
will fund your lifestyle.  

“You only need 70% of income in
retirement” – Bad rule – in
fact, many people spend more in the first years of retirement as they travel
more while spending far less in their 70’s and 80’s as their needs become
fewer.  This can be further complicated
by estate planning goals of gifting to children or charities. 

“Hold six months after-tax income for a rainy
day” – Decent rule – however,
this depends on liquidity, borrowing ability (e.g., home equity line) and cash
flow.  If annual income permits
substantial savings, such that you could pay for a new roof without affecting
lifestyle, your “rainy day” reserve can be much less. 

“Monthly payments on debt should not exceed
20% of income” – Decent rule
– in fact, the rule is somewhat irrelevant in that most lenders apply rules to
limit mortgage payments plus home insurance and property taxes to a percentage
of income.  As with the savings rule,
your level of debt may be more or less depending on assets available, risk
tolerance and lifestyle costs. 

“Do not refinance until rates drop 2%”– Bad rule – the test is simple:
how soon will the cost of refinancing be recouped by lower payments?  With no points/no closing cost loans, this
can a year or less.  Buying down a rate
by paying points will make sense if the pay-off is in 12 to 24 months and if
you plan to stay in the residence for seven years or more. 

“Delete collision coverage on a
car more than 7 years old” – Decent
– as with the “rainy day” reserve, this depends on cash flow and
other resources.  It also depends on
whether the car is your “antique.”

“Do not spend more than 7% of
income on long-term care insurance”– Uncertain
– some people may have sufficient assets to self-insure.  Some people will not risk nursing care due to
bad family health history; they will want to pay for full insurance.  

Are you going to break the rules?

While breaking rules may or may not work for you, creating and sticking to a financial plan will! (The future you will be glad you did!)

What is Retirement?

I actually think the whole concept of retirement is a bit stupid, so yes, I do want to do something else. There is this strange thing that just because chronologically on a Friday night you have reached a certain age… with all that experience, how can it be that on a Monday morning, you are useless? 

-Stuart Rose

Does “retirement” mean no more paycheck and collecting social security? 

What if you don’t want to wait until you are in your 65 to “retire”?


Financial Independence

When you have enough money to retire, whether you choose to stop working or not, you are financially independent. So, “saving and investing for retirement” typically means taking some of what you earn to invest so that you have more funds in the future from which you can withdraw to pay for lifestyle expenses, without relying on anyone else for support.  

Use of Insurance

Retirement is different
from being disabled, where you cannot work, for which you may buy disability insurance,
and from early death, for which you can buy life insurance to help take care of your