There are numerous ‘rules of thumb’ in the industry: rule of 72; invest 125 minus your age in equities; withdraw no more than 4% of your account balance in retirement. My point is not to debate the merits of each (well, you really can’t debate the rule of 72 anyway – that’s just math). Instead, I wanted to draw attention to a rule of thumb I ran across today for the first time: 3 to 1 (working years to retirement years).
Take a look at this article from SmartMoney. The writer, Alicia Munnell, suggests that delaying retirement by four years (two years to compensate for the change in Social Security’s full retirement age from 65 to 67, and two years to cover rising health care costs) “dramatically changes the arithmetic” for calculating retirement funding. That four-year delay roughly places a person’s working years to retirement years ratio at 3 to 1.
What do you think? Have you heard of this ratio before? Does anyone use this ratio in their practice to help explain the importance of not delaying retirement savings?
Vice President, Smart401k
Smart401k is a web-based investment advisory service providing unbiased recommendations to help people invest in employer-sponsored retirement plans. Smart401k provides service to nearly 11,000 clients who collectively have more than $2 billion in assets. Plan participants receive personalized, fund-specific investment recommendations and the support of professional investment advisers available to discuss all investment questions. Based in Overland Park, KS, Smart401k is online at www.smart401k.com.