Do Not Rely on a Rule of Thumb to Retire

It’s kind of a rule of thumb for me to self-doubt going into any kind of project.
–Heath Ledger

When we made the decision to retire early, we went through a lot of analysis on whether or not we would have enough cash flow from our rental properties to meet our living expenses, as well as coming up with a very detailed contingency plan for what actions we would take in the event of realizing negative tail risk in early retirement. Fortunately, from a financial perspective (not from a life enjoyment perspective), the lockdown caused by the coronavirus pandemic has driven our expenses down much more, as a percentage, than our portfolio has dropped, meaning that we haven’t actively needed to take any steps in our contingency plan (particularly given that the first one, cut out discretionary spending, has been very amped up due to our inability to travel).

We went through a TON of evaluation on our decision, and even afterwards, we still had the wine-fueled “I don’t know if this is going to work” discussion a couple of months into early retirement. We also didn’t blindly assume away other expenses and take a reckless approach to FIRE.

We measured a whole bunch of times before cutting (hopefully) once.

Yet, as we saw in “Beware the Rules of Thumb,” we’d much rather live our lives by simple rules of thumb. Thinking is hard, and our limbic systems would rather live by heuristics than having to put in the intellectual effort and mental energies to come up with answers specific to our personal situations.

Math is hard, right?

That’s why personal finance gurus want you to believe that there are financial secrets to achieving the life that you want. It’s the personal finance version of the magic weight loss pill.

For having already been FIREd for five months, then, I sure get my dander up when I see inane article simplifying retirement and have my mind blown that people would actually rely on simple rules of thumb when making a decision that has some pretty devastating negative effects if you get it wrong (hello, Walmart greeter at age 95).

How Many Different Rule of Thumb Mistakes Do We Make When We Make Retirement Decisions?

The 80% Spending Rule

The first one I found was research by Texas Tech’s Dr. Michael Finke, CFP (whom I respect highly), debunking the idea that you should expect to spend 80% of your pre-retirement income during retirement.

I have no idea where 80% even came from, aside from thin air or someone’s backside.

Every family’s situation is unique. Some people are able to save 77% of their income. Others struggle to make ends meet, and will have to rely on Social Security for their post-retirement income.

Furthermore, research from the Employment Benefits Retirement Institute shows that 34% of retirees find themselves spending more in retirement than they thought that they would, which is a pretty sure sign of not doing sufficient preplanning on retirement spending before actually retiring.

So, if your financial planner is telling you to rely on 80% of your income as a rule of thumb, fire your planner.

If you’re relying on that number, do a little more digging (I have an entire course on determining when and how you can retire.

Four Simple Rules for Retirement

This one was the biggest head shaker of the articles I saw.

The Motley Fool apparently believes that if you can master four basics of personal finance, you can retire. It’s pretty easy to take away from this article that if you can:

  1. Make a budget
  2. Don’t impulse spend
  3. Have an emergency fund, and
  4. Have no debt

…then you are good to go to retire.

Those are necessary but not sufficient conditions for you to be able to retire, but there are probably another 50 gates to go through before you really can retire. If you don’t know what they are, you can check out my FIRE playbook to get you a bunch of the answers you need.

Giant Round Numbers

An article in the Motley Fool shows some research from “people who have run the numbers” on how much they think that they’ll need for retirement. It turns out that 40% of workers think they’ll need $1 million, and 16% of workers think that they’ll need $2 million to retire.

While I’m not a fan of fake false precision, that you need $1,753,487.39, not a penny more, not a penny less, rounding off to the nearest million is not going to help you. If you need $1.49 million, then undershooting by $490,000 means that you’re facing a 32.8% shortfall in retirement. That’s a mighty big miss.

What Should I Do to Determine My Retirement Needs?

I really didn’t mean to make this an advertisement for my my FIRE playbook, but it has, since that’s the type and level of intellectual rigor you need to go through before you make the decision.

In the alternative, if you’re not the do-it-yourself type when it comes to personal finance, then go get an hourly, fee only Certified Financial Planner to go through your entire financial plan. There’s a reason that you have to go through a curriculum, a standardized (and by no means easy) exam, and need, in most cases, at least three years of practical experience before you can become a CFP.


Because financial rules of thumb do not work.

Don’t fall into the trap. If you do, digging out might be really hard and come at a time when the shovel feels awfully heavy.

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Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

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