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5 Rules for Financial Freedom

An update of common principles for managing your fiscal life

5 Financial Rules of Thumb, couple on a swing

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Experts weigh-in on financial rules of thumb that could help you with planning for retirement.

Financial rules of thumb can be handy, but not if they're outdated. Here are five rules that get the thumbs-up — or down — from experts.

1. The Rule: Save 10 percent of income for retirement.

The Verdict: Thumbs Down

This may have worked decades ago, when workers had pensions and shorter life expectancies. Today, 15 is the new 10. Workers should save at least 15 percent of their gross income — which includes any employer 401(k) match — to maintain their lifestyle in retirement, says Stuart Ritter, a senior financial planner at T. Rowe Price in Baltimore. "If you have not saved anything, however, the older you are, the more above 15 percent you need to go," he says — such as 36 percent if starting at age 50.

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2. The Rule: You need three to six months' worth of living expenses in emergency savings that can be accessed quickly.

The Verdict: Thumbs Up

This rule is still golden. "Americans in general have no money in emergency savings," says Mari Adam, a Boca Raton, Florida, financial planner. "If they have to fix the car or repair the air conditioner, they will put that on a credit card that charges 18 or 22 percent interest." She recommends investing that money in a balanced mutual fund that has a mix of stocks and bonds, which will have a higher return than a savings account but not too much risk.

3. The Rule: At retirement, you should have 10 to 12 times your final salary in savings.

The Verdict: Thumbs Up

Along with Social Security, this should be enough to generate 70 to 80 percent of preretirement income for most people, says Charlie Farrell, chief executive of Denver-based Northstar Investment Advisors.

4. The Rule: Your annual income in retirement should be 70 to 80 percent of your preretirement gross income.

The Verdict: Thumbs Up

You likely already live on that amount once you subtract your 401(k) contributions, Social Security taxes, commuting, and other work-related expenses from your paycheck. Those costs will disappear in retirement, which is why you may need only 70 to 80 percent of your old salary to maintain your lifestyle. Be aware that if you start spending thousands in retirement on travel and expensive hobbies, you will need more.

Need help figuring this out? The Employee Benefit Research Institute offers the Ballpark Estimate online calculator. It can help you determine whether you're on target to meet your income needs in retirement.

Use AARP's Retirement Calculator to see if you're saving enough

5. The Rule: Subtract your age from 100 to determine how much you should hold in stocks.

The Verdict: Thumbs Down

Under this old rule, 55-year-olds should have 45 percent of their investments in the stock market. That's too conservative, financial planners say, given that people are living much longer and will need the growth that stocks can provide for both keeping up with inflation and not running out of money. A better guide: Subtract your age from 120.


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