Decoding the 10x Rule for Retirement: Is It Too Conservative?

Music. Welcome and welcome to the Healthy and Wealthy Retirement. My name is Mark Struthers.

I am your host. Thank you for joining us. Today we are talking about the 10 times rule for retirement. And we're also going to discuss why I think for many people, this rule might be too much, meaning it's a little conservative. They might not have to have 10 times their gross income at retirement. The reason I chose this topic was there was a Today Show episode where they talked about the silver tsunami.

We're having a bunch of boomers retiring, which poses financial and cultural issues as we move forward. But a lot of that's a topic for another time. But this financial expert was asked, how much do I need to save? And she brought up the 10 times rule. I still like the rule. And you can tell by using the word still, there are many rules of thumb I do not like anymore. I've been in the industry for over 20 years.

I've been a chart financial analyst, which is kind of the number side that's a portfolio manager, what portfolio managers often have, finished a little over 20 years ago. Been a CFP or a Charred Financial, Certified Financial Planner practitioner for a little over 10. But years ago, there were rules of thumb that were applicable, but times have changed. There has been a lot of what they might call secular changes, paradigm shifts.

But the 10 times rule, I still like, and I'm going to tell you why. The 10 times rule sounds pretty simple, but like many rules of thumb, they can do more harm than good, especially many of those that, well, I consider to be outdated. But any rule of thumb, again, is a one size fits all. It's an easy button. You don't have to spend much time thinking about it 10 times, but no rule of thumb is going to take the place of a real financial plan.

A real financial plan looks at your goals, your values, and some of those emotional things, the non-CFA things, more of the CFP type things, the things that matter to you. And it also, we run scenarios, we map out numbers and projections and take into account risk and everything else, your goals, your spending. No rule of thumb is going to take the place for a real financial plan. So I think you got to just get that out of your head right away.

But I will say as rules go, this is not a bad one, especially when it takes some time to understand it. So what does a 10 times real estate says, whatever your gross income is before you retire, you should have 10 times that in investments. So if you're making a hundred thousand dollars at retirement, you should have $1 million save. $1 million or $200,000. If you're making $200,000, you should have $2 million saved.

Now, I think Fidelity came up with this rule. And if they didn't, I apologize to whomever did. But they actually give you... They've done a lot of writing on this, so I tend to think they came up with it. It seems like something they might do. But that being said, they actually have some benchmarks along the way that you might want to get to. And they highlighted these on Today Show. Now, they didn't mention Fidelity. Maybe they can't.

I'm not promoting Fidelity. Fidelity has a lot of flaws. Many of these larger financial institutions do. But some of their writing, you got to give credit where credit's due, is not bad. So the benchmarks are one times your income at 30, three times at age 40, six times at 50. For the purpose of this YouTube channel, please separate out the process that you use to get there, including these benchmarks, as to what you're getting to, which is the 10 times your gross income at retirement.

We're just talking about why having that 10 times your gross income in retirement with investments work. The rules around the benchmarks are going to be a little more complex because it all depends on assume rates of return. It assumes certain savings levels along the way. So that's for another time. But why does the 10 times ratio work? To put it simply as possible, it is so it replaces roughly 40% of your income

with social security replacing probably another 30 to 40%. I will say this is in my opinion. I'm not sure if anyone's ever actually said why this works. But from my point of view. Here's why it works. Keep in mind when you're talking about Social Security, the more you make, the lower the percentage of income that Social Security will replace.

The less you make, the more it will replace. Not to mention that the more you make in retirement, wherever that income is coming from, the more your Social Security is going to be taxed. That's a separate issue. But the bottom line is, with the 10 times rule, between the two, your investments and Social Security, you're replacing roughly 70% to 80% of your income. And for most people, that is going to be enough.

Now, I know there's been some other studies and some debate about this, but most of your larger, like we use Vanguard, Vanguard, I think, in their 401k calculations, they assume 75%. When you think about what goes away, your payroll taxes go away. That's 7.65% for most of you. That goes away. There's a lot of spending that goes away. You know, obviously you could have a lot of hobbies or travel or other things.

But again, that's where a financial plan will catch those, you know, and it also could be health care. But years ago, when I started in the industry, the assumption for many pensions was around 60%, 65%. And it wasn't horribly long ago that a lot of folks would, a lot of these bigger firm calculators would assume 70% or less. And just my experience working with clients over all these years, it's unusual for that much spending to keep up. And that's really an entire show or two.

But quite often what you have is you have a lot of spending initially as they're excited, they have their hobbies, they can't grandkids travel, but then they settle down, could be forced because of they can't get around. Like they used to, but then later in retirement, it shoots back up. So smiley face or stages. When we do scenarios, we have predetermined spending styles because to simply do an inflation adjusted consistently throughout retirement.

Is rarely accurate. Again, that's where it's a personal preference. But that being said, from the 10 times rule, this is why I think it works is because that 80%, 70 to 80% is going to catch most people. You probably get the social security part as far as that being around 40%. It was never meant to replace all of your income. But you might be asking yourself, why 40% for the portfolio? Why did you pick that number mark? Well, I didn't pick it.

I assumed whoever came up with this rule, or for me, maybe I read into it, and for me, that's why it works. It follows the 4% safe withdrawal rate for your investment rule. And we'll cover the 4% rule in more detail. But what this rule basically says is if you have $1 million at retirement, and say you were following the 10 times rule, it's because you're making $100,000 gross, you can withdraw off $40,000 or it replaces 40% of your gross income.

The key with the 4% rule, it not only factors in stock and bond market returns because it's based on retiring before the worst possible time in history. The worst possible time, right before.

No, it's not the worst possible time doesn't happen 5, 10, 15 years later because by the time that hits, assuming you follow that rule, that the equity portion has grown so large. It doesn't matter, but I'm getting ahead of myself as I often do. But the key, the main thing with the 4% rule or one of the main things is that it factors in inflation. So when you think about the 10 times rule, it's capturing social security and it's also capturing your investments that your portfolio will last.

It assumes the longevity of your portfolio and both those adjust for inflation. Social security, not as good as the 4% rule does. Self-security has COLA, cost of living adjustment, which isn't perfect, but you still, it's still. Still not bad compared to when you compare it to more, most pensions these days. So you have, you're replacing 70 to 8% of your gross income, which is more than enough for most people. And it's adjusted for inflation, not healthcare inflation, but normal inflation.

So why do I think the 10 times rule is too much? It's too conservative for most folks? Well, one, I think the 4% rule is too conservative for a lot of people. As mentioned, it assumes you're retiring before the worst possible time in history, 30 year period in history. And it assumes there's no adjustments that you don't say, hey. You know, we're in the middle of the Great Depression and, you know, let's cut back on that trip we had planned.

Let's buy a car every 10 years instead of every seven, whatever it is. So it seems a little unrealistic, you know, and subsequent studies done around the 4% rule, when you mix in other asset classes, shows that it's actually much higher than 4%. And keep in mind, too, if you don't retire before the worst possible time in history, quite often you're going to have a lot more than you even started with.

Maybe not on an inflation-adjusted basis, but you're going to have more than you started with at the end of that 30-year period. And let's be honest, a lot of people just pass early. There is also the issue that the 10 times rule, because it's incorporating Social Security, is assuming that you're retiring at age 67.

Which if you do that, and the 4% rule is based on a 30-year time horizon in retirement, you're planning to age 97, which most people don't do. That if you're really assuming age 67 retirement, the 4% rule, again, is too conservative because if you're only planning to age 90, that's only... 23 years. It's even unusual. Some folks would even plan for 85 or 87 years. If that's the case, you can take out a lot more than 4%, which means you don't need the 10 times.

It could be seven times. It could be eight times, whatever the case may be. For higher earners, as mentioned, Social Security is not going to replace as much, or if you retire early. To keep in mind, if you're going to retire early, then that might need to be adjusted. If you're going to start withdrawing from your portfolio early, if you claim early, it's going to replace less than that. So in that case, you might need more, you might need less, that you'd have to.

Again, do some sort of full financial plan. And for higher earners, because Social Security often replaces a lot less, if Social Security is replacing 20%, you might need 10 or 13 times more. And I know we're across too many higher earners that actually really work fully to age 67. They might work part-time, but quite often they're retiring early, which if you can do that on the 4% rule, but then there might be delaying Social Security.

And that's where our full financial plan, we run those scenarios and say, what does that look like? But some of this is an additional topic for another day.

Thank you for tuning in. I hope this help explains what the 10 times rule is, why I think it's still valid for a lot of people, and why I think for many people, it's probably a little too conservative. Please hit the subscribe button below. If you do and you tune in weekly, you will have a healthier, a wealthier, and a happier retirement. Stay well, everyone. Music.