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What’s Your Number?

The importance of planning and going beyond “rules of thumb”

Rules of Thumb

Many “rules of thumb” attempt to help guide us toward a successful retirement; perhaps you’ve heard of some of them:

  • You will need 70-85% of your pre-retirement annual income in retirement.
  • By age 50, you should have saved enough to equal six times your salary. By age 60, your savings should be eight times your salary. Finally, you should have 10 times your final salary in savings by the time you retire.
  • An annual portfolio withdrawal rate of 4% is ideal.
  • Your portfolio should generate enough in dividend and interest income to sustain you.

While coming up with these numbers (based on rules of thumb) can provide a reference point for what has generally worked for some people, in truth they are broadly accurate principles that do not directly apply to you or your situation. Meaning they are unlikely to be very useful in helping you achieve your specific goals or assess where you currently stand.

In addition, let’s be honest, rules of thumb are not only loosely applied generalizations, they are lazy. The implication is that, rather than doing the work to figure out what is truly best for your situation, you can simply apply a loose guideline and call it good. In reality, you will need to examine your situation, rather than the general circumstances of others, in order to make a genuine assessment of your retirement readiness. This means closely evaluating your lifestyle, your resources, and your objectives while making reasonable assumptions for factors such as longevity, inflation, and investment returns.


A quality financial plan will address all of these concerns, which really boil down to three important questions: 

  • How much income will you need when you retire? (Read this)
  • How much capital do you need to save or accumulate for retirement?
  • What is a safe distribution strategy or what is the optimum distribution strategy for you?

When we analyze a client’s on-track status for retirement, using meaningful and carefully considered data and assumptions, we are able to provide them with a Probability of Success. To do so, we first compile all of their information, quantify their goals, and make reasonable assumptions. Next, we run their plan through a thousand random and varied scenarios to see how many trials succeed. The resulting number of successful trials gives us their Probability of Success, which lets the client gauge how on-track they are and whether adjustments should be made to strengthen their plan. We can also see how each adjustment (delaying retirement, saving more, spending less, etc.) impacts their plan and Probability of Success. While this does require more work, you will find that this number is much more useful than one produced by applying a simple rule of thumb.   


To illustrate the importance of planning, a study in 2006 by Annamaria Lusardi and Olivia S. Mitchell found that investors who had taken even a small amount of time to do some planning, ended up with two- to three-times more money at retirement than investors who chose not to plan at all. If that isn’t a compelling reason to put in the work, I don’t know what is.

Now that you understand the importance of taking the time to put together a well-thought-out plan, please remember this: planning is a process. The plan itself has no real value. The value comes from taking the time to examine where you are and where you are headed, evaluating the plan regularly, making adjustments as needed, and staying disciplined.

So, what is your number (i.e. probability of success)? If you don’t know the answer, we are happy to help.

Megan Nichols, CFP®


This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Community First Bank, HFG Trust, and HFG Advisors have no duty or obligation to update the information contained herein. Further, Community First Bank, HFG Trust, and HFG Advisors make no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is potential profit there is possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services, banking services, or an offer to sell or solicit and securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Community First Bank, HFG Trust, and HFG Advisors believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, included the information contained herein, may not be copied, reproduced, republished, or posted in any form without the prior written consent of Community First Bank and/or HFG Trust and/or HFG Advisors. HFG Advisors, Inc, is a wholly owned subsidiary of HFG Trust, LLC. HFG Trust, LLC is a Washington state-registered Trust company and wholly owned subsidiary of Community First Bank.