Money: Planning for your Retirement: Rule of 100
There are some people who are natural-born planners. Their lives revolve around to-do lists, color-coded appointment books and calendar apps, and while these people take planning to an extreme, we all engage in some sort of future mapping. Whether we’re programming our GPS, planning a dinner party or simply checking the day’s forecast, we want to know what to expect and how to prepare for it. So why are some people so intimidated when it comes to planning for one of the most important events in their lives: retirement.
One reason might be that planning for retirement involves two things people are sometimes uncomfortable talking about — money and getting older. Another is that people are fearful of an ever-changing market and want to avoid risks. But the idea that big rewards must always include big risks is a misconception. It’s a common practice among financial planners to conduct a risk-assessment with their clients before any decisions are made. This is the time to be honest about how much risk you are willing to take. There is nothing wrong with being conservative with your investments. This is your gut-check; trust your instincts.
Another way to manage your risk is through The Rule of 100. This concept uses your age as a baseline to determine where to best allocate your assets. Start with the number 100, then subtract your age. The remaining number is an immediate snapshot of what percentage of your retirement assets should be in riskier financial products.
For example, say a 65 year old has $100,000 saved for retirement. To apply The Rule of 100, start with 100 and subtract 65, the remaining value is 35. In this example, the client should have no more than 35 percent, or $35,000, of his or her assets in at-risk money instruments, i.e., stocks or equities. This leaves 65 percent, or $65,000, of his or her assets to be allocated to safe money instruments, i.e., savings accounts, CDs, government securities, fixed annuities, or fixed index annuities. If this same client had 100 percent of his or her assets invested in the stock market and the market declined 40 percent, a significant portion of this person’s nest egg would be lost.
And of course, the opposite is true for a younger person. They have time to make up any losses. So a 35 year-old with the same amount set aside for retirement can put 65 percent of his or her assets in stocks or other high-risk money instruments. They would just need to adjust their investments as they got older (See Age-Specific Retirement Planning sidebar).
It’s all about time — not just tolerance for risk — when it comes to retirement planning. There is no better time than now to start planning for your retirement, no matter what your age.
Safe Instruments:
Savings & Checking • Money Market • CDs
Fixed Annuities • Treasury Bills • Treasury Notes
Fixed Indexed Annuities • Life Insurance
At-Risk instruments:
Individual Stocks • Mutual Funds • Bonds
Variable Annuities • Managed Portfolio
Money Market Fund • Variable Life Insurance
Here are four decades of “dos and don’ts” as you plan for your retirement. The earlier you start, the stronger your retirement plan will be.
In Your 40s:
Maximize all retirement plan contributions. • Pay more than required on house payment. • Keep short-term debt to a minimum. • Fund college for kids.
In Your 50s
Maximize all retirement plan contributions. • Begin reducing risk in portfolios to avert significant loss before retirement. • Eliminate short-term debt. • Determine where you want to retire, and consider cost of living there. • Consider possible inheritances in income planning.
In Your 60s
Saving for retirement in your 60s will make a significant difference in lifestyle at retirement. • Determine best place to save: 401K, IRA, Roth IRA? • Time to catch up — maximize your 401K. • Catch up provision for IRA up to 6K/year. • Determine the age you will begin social security. • Factor in health care costs. • Reduce risk in your portfolio.
In Your 70s
Receive social security income. • Minimize unearned tax interest income to avoid tax on social security. • Conduct a beneficiary review on all accounts. • Consider a trust. • Consider gifting to children and charitable gifting. • Have savings cushion for health care costs. • Significantly reduce, even eliminate risk in investments.
About Gary Garrison
Justin E. (Gary) Garrison, Jr., is a well-known financial educator in central Arkansas. He is president and founder of Asset Protection Wealth Management and has counseled thousands of Arkansas seniors. Retirees from many major employers, including AT&T, Baptist Health, Farmers Insurance Group, Entergy, the VA Medical Center and the Arkansas public schools system, have consulted with him to find ways to preserve their capital, increase their income and more profitably organize their investments. His specialty is assisting those approaching, or now in retirement, financially prepare for and enjoy their retirement years.
