June 2024
Barbara O’Neill, Ph.D., CFP®, AFC®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension
In Small Steps to Health and Wealth™ Strategy #13 (PDF), Compare Yourself With Recommended Benchmarks, there are a number of metrics that people can use to measure their financial status. This monthly message continues that theme with a description of seven commonly used financial planning "rules" (i.e., general guidelines).
Each rule contains a number and they are listed in numerical order. Note that these rules are not "set in stone" and they are meant to be aspirational, not discouraging. It's perfectly OK if you cannot follow these rules today. The most important thing is to do what you can- when you can- and scale up over time. Every small step matters!
Rule of Three- This rule simply means that you compare at least three product or service providers against each other using personally selected criteria that are important to you. Examples of criteria for a purchase might include price, warranty protection, product availability, reviews by users or Consumer Reports magazine, and ease of use. This worksheet (PDF) provides a framework to list search criteria and record details about items being compared.
Four Percent Rule- This rule is based on 1990s research that found retirees could safely spend 4% of their retirement nest egg and adjust withdrawals annually for inflation and not run out of money over a 30-year time frame. It assumes that 50% of savings is in stock. A related rule, based on the 4% metric, is the Rule of 25, which suggests people should aim to save 25x the income they need in retirement, especially if they are using investment withdrawals as a primary source of retirement income. Example: $60,000 multiplied by 25 equals $1.5 million.
Fifteen Percent Rule- Many investment companies and personal finance experts recommend saving at least 15% of pre-tax income (including employer match) over the course of a career to accumulate enough money to live comfortably in later life. With a $60,000 income, this amounts to $9,000 annually. Many employers match savings fifty cents on the dollar so a $6,000 deposit ($230 biweekly) could trigger an additional $3,000 of savings.
Rule of 72- As noted in a prior SSHW message, the Rule of 72 is a simple formula that is used to estimate either the interest rate or the time period required for a sum of money (any amount) to double. Simply divide one of these two variables into 72 to solve for the unknown variable. As the interest rate earned on an investment decreases, the time required for a sum of money to double lengthens. For example, it takes 9 years to double a sum of money with an 8% rate of return (72 divided by 8) and 18 years to double it at a 4% rate of return (72 divided by 4).
100-Age Rule- The frequently cited "100-age formula" is used to determine the percentage of stocks in someone's overall investment portfolio There are also two corollary rules: 110-age (for investors with a moderate risk tolerance) and 120-age (for investors with an aggressive risk tolerance). For example, the suggested asset allocation guideline for a 45-year old moderately aggressive investor would be 65% (110 – 45) in stock. The remainder of the portfolio would be allocated to bonds, cash equivalent assets, and/or other asset classes.
Rule of 115- The Rule of 115 is a simple formula that is used to estimate either the interest rate or the time period required for a sum of money to triple. Like the Rule of 72, simply divide one of these two variables into 115 to solve for the unknown variable. For example, with an 8% return, it would take approximately 14.4 years to triple a sum of money. With a 4% return, it would take 28.8 years.
Rule of 144- The Rule of 144 is a simple formula that is used to estimate either the interest rate or the time period required for a sum of money to quadruple. Like the Rule of 72 and Rule of 115, simply divide one of these two variables into 144 to solve for the unknown variable. For example, with an 8% return, it would take approximately 18 years to quadruple a sum of money. With a 4% return, it would take 36 years.