Humans went 200,000 years without numbers until the Sumerians first inscribed clay tablets and baked them in the sun. Today, numbers power satellites, help us predict the future and serve as rules of thumb for retirement planning. And while numbers have generally proven useful, the same can’t be said of the “magic numbers” on which some often base their retirement decisions.

 

The 4% rule

 

In 1994, U.S. financial planner William P. Bengen devised a “safe” retirement savings withdrawal strategy that would guide a generation of retirees – the 4% rule. Under this rule, you withdraw 4% of your total retirement assets in the first year of retirement. Then, in subsequent years, you increase the amount by the previous year’s inflation. So, if your nest egg is $1 million and inflation is 2%, you would withdraw $40,000 in the first year and $40,800 ($40,000 plus 2%) in the next. Stay the course and, according to Bengen, you can expect your portfolio to last 30 years.

Bengen has since retired, and it may be time the 4% rule followed. The 4% figure is based on historical returns of the U.S. market, not today’s markets. Moreover, the rule doesn’t work if the markets do something unexpected. If returns are subpar, especially in the first few years, your savings may not last 30 years.

 

100 minus age

 

Asset allocation and the discipline of adjusting it to your goals is complicated and time-consuming. So, along came the “100 minus your age” rule. How it works: subtract your current age from 100, and the remainder is your suggested equity allocation, with the difference being your fixed-asset allocation. For instance, if you are 55 years old, 45% of your portfolio should be in stocks.

Unfortunately, while convenient, this rule doesn’t take into account rising life expectancies or falling interest rates. Also, not everyone retires at the same age, or shares the same tolerance for risk or investing goals. An age-dictated rule ignores many essential factors. Imagine you are risk-tolerant, 40 years old and have an investment horizon of 30 years: the rule would suggest a 60% equity allocation, which may be too conservative.

 

Few retirement decisions can be made using universal “magic numbers” – your retirement numbers are unique to you and a personalized financial plan that takes into account your individual circumstances and specific needs is the best way to go.