A Rule of Thumb Is Not a Plan

Occasionally I read about a new method or model for determining your portfolio withdrawal rate during retirement, or a formula to use when setting your asset allocation. While there’s nothing wrong with organisations trying to make things simple with these important questions, I sometimes wonder about how the research is framed.

Normally it’s a respectable financial institution, quite often backed by research from an in-house team or an academic institution, sometimes a combination of both. I’m sure the data and back-testing is rigorous and the intention is genuinely to help people figure things out. But I think the veneer of respectability can lull readers into a false sense of security.

However you dress these research papers up, a simple truth is often lost in the data and jargon. They are all just rules of thumb. Useful perhaps as a rough outline, but not a substitute for planning grounded in your own personal circumstances.

While it’s the best tool we have, back-testing, as the name implies, is backward-looking. It tells you what would have worked across historical sequences of returns. It says nothing meaningful about your specific thirty-year window, which is genuinely personal. Markets, inflation, healthcare costs, tax policy, none of these will behave exactly as they have before. A rule derived from the past is being asked to do a job in an unknowable future.

So leaning heavily on these shortcuts when making decisions about your financial future is, I think, a mistake. The question is what you should do instead.

At the very least you should start by building a realistic picture of your yearly spending needs and mapping this across your planning horizon. I know that sounds straightforward but most people underestimate what it actually involves. Your spending won’t be flat. Early retirement often brings higher discretionary costs: travel, hobbies, the things you finally have time for. Later years can bring rising healthcare and care costs. A simple annual figure won’t capture any of that, and if your foundation is wrong, everything built on top of it is compromised.

Getting this right takes time and a degree of honesty about how you actually live, and how you expect to live. But it’s worth it, because once you have a realistic picture of your withdrawal needs across time, you can start to think about the portfolio that has to support them. Asset allocation stops being a formula and becomes something more useful, a structure designed around your life rather than a generic model designed for everyone and therefore truly tailored to no one.

I know with Humble Dollar I’m preaching to the choir. Rules of thumb have their place. They’re fine for a back-of-the-envelope sense check. The problem is when people treat them as a plan. Retirement isn’t a generalisation. In the final analysis, it shouldn’t be managed like one, however academic the research behind it sounds.