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7 Rules of Thumb for Retirement Planning

Robert Berger

Rules of thumb often develop because they're at least somewhat accurate and are helpful when running off-the-cuff measurements. When it comes to retirement planning, rules of thumb abound, and they're often quite helpful in setting savings, investment and withdrawal goals. The following seven rules of thumb for retirement planning will help put you on the right track for a comfortable retirement:

1. Have an emergency fund equal to six months' worth of income. This isn't strictly a retirement planning goal, but having an emergency fund is the basis for many good financial plans. If you have money on hand to weather small and large emergencies, you'll be less likely to stop saving in an emergency, borrow from a retirement plan or rack up high-interest debt because of unexpected expenses. And even if you do have an emergency fund, you don't have to stick it into an account that earns next to no interest. There are plenty of great places to put an emergency fund, like a high-interest savings account or CD ladder.

2. Save at least 10 percent of your income for retirement. Many financial gurus advocate for paying yourself first by automatically saving 10 percent of your income for retirement. The personal savings rate for Americans is currently 3.2 percent of disposable income, according to 2013 statistics from the U.S. Department of Commerce. Saving 10 percent of your income in a 401(k) or IRA account every year will get you well on your way to retirement as long as you start early.

However, this rule of thumb breaks down a bit if you don't start saving until well into your career, in your thirties, forties or even fifties. Starting early allows you to tap the power of compounding interest. The sooner you save, the less you'll have to put in to meet your retirement savings goals.

3. The percentage of bonds in your portfolio should equal your age. As you age, most experts agree that you should shift more of your portfolio into less volatile investments, like bonds, which will be less likely to lose lots of money if the market crashes. If you're very young, you can handle more uncertainty and potentially get better returns by investing in stocks.

This rule of thumb is quite conservative. While you might want to have 60 percent of your portfolio in bonds at age 60, having a full 30 percent in bonds at age 30 might be too much for you. It really all depends on your risk tolerance, which has to do with more than just your calendar age. Things like your current job, personality and family situation all play into your risk tolerance, too.

4. You can expect to get an average of 7 to 8 percent per year from a diversified domestic stock portfolio. When you're setting goals for retirement savings, many online calculators will ask what you expect to make on your portfolio. Plenty of experts say that you can expect to earn an average of 7 to 8 percent per year from a diversified domestic stock portfolio.

Of course, this is the stock market we're talking about, so nothing is guaranteed. Depending on where your investments lie, how diversified they are and what the economy is like, you could make more or less than this in any given year. Plan accordingly.

5. Shoot to replace 70 to 80 percent of your pre-retirement income during retirement. Many financial advisers will say that you should aim to replace 70 to 80 percent of your pre-retirement income with Social Security, retirement savings or any other retirement income you may have available to you. Again, this works out for many people, but not for everyone.

For some reason, you may have higher-than-average retirement needs. Maybe you or a spouse has serious medical issues, or you have a disabled dependent who will never be able to live on his or her own. In this case, you'll want to try to replace even more of your pre-retirement income during your retirement years. However, at least one study suggests that many retirees will need just 35 percent of their pre-retirement income.

6. Plan to save around eight times your final income for retirement. Investment firm Fidelity offers one interesting retirement planning model that can help you set goals by age. The plan winds up with you saving eight times your income by the time you retire. So if you retire at 65, you'll need to have saved eight times the amount you're making per year as of that year. This plan is helpful because it gives you goals to meet throughout your working years, including saving one times your income by 35, three times by 45 and five times by 55.

7. Assume you'll withdraw 4 percent of retirement savings each year during retirement. Many retirement plans are based on the idea that retirees will withdraw 4 percent of their savings per year during retirement. The theory is that you'll earn 7 to 8 percent, spend 4 percent and invest the remainder to keep pace with inflation. But in today's low-yield environment, 4 percent may be too much. One New York Times article recently noted that a retiree with a $1 million nest egg invested in municipal bonds (once a favorite of retirees) would have a 72 percent possibility of running out of money before death if they withdrew on those bonds at the rate of 4 percent a year.

Measure twice, cut once. As with all rules of thumb, these for retirement and savings are based on averages. And, of course, no single person is truly average. It's better to develop a personalized plan when it comes to retirement than it is to operate solely off of rules of thumb. Instead, meet with a financial planner or do more extensive research to set retirement savings and spending goals based on your unique personality, life and financial situation.

Rob Berger is the founder of the popular personal finance blog, the Dough Roller.

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