“Don’t spend more than 4% of the market value of your account each year in retirement.”
“Buy life insurance worth seven to ten times your annual income.”
These are all examples of personal finance rules of thumb.
They’re easy to remember and easy to understand.
And according to researchers, they work pretty darn well.
“People do better at achieving goals when they set out rules for themselves,” says Katherine Carman, an economist at the Rand Corp., a global research institution.
She coauthored a 2009 paper studying how people make retirement savings and planning decisions.
Among the findings?
“A rule of thumb is very effective for wealth accumulation,” discovered the researchers.
They may be simple, but they work.
Carman found that individuals without any guidelines or plan saved on average only 3% of their salary.
But people with a plan saved 10% to 15% of their salary, putting them way ahead in the savings game.
And here’s more good news.
The savings “plan” did not have to be complicated or elaborate.
Simply following a “rule of thumb” — like the one to save 10 to 15% of income each year — was more than enough, leading people to save double or triple the amount of money of those with no plan at all.
The Takeaway: If you want to enjoy your retirement freedom, you need to put money aside. Let us show you some simple strategies to help you meet your goals.