Retirement Financial “Rules of Thumb” to Consider
A “rule of thumb” is defined as a heuristic guideline, specifically, one that provides simplified direction or some basic grouping of rules on a particular topic. It is a general cognitive principle that gives practical instructions for how one can approach a target goal or planned task.1 Typically, “rules of thumb” develop over time as a result of practice, experience, or trial-and-error, rather than through scientific research.
Although clinicians rely on evidence-based medicine in their everyday practices, there are still rules of thumb in health care. The business of medicine is also no exception. In my experience, the following are important money “rules of thumb” in the financial planning industry to know and consider if they apply to your post-practice retirement plans.
Rule of 4
Researcher and colleague Bill Bengen, CFP developed this rule of thumb back in 1994.2 The 4% rule for retirement budgeting suggests that one should be able to withdraw 4% of the balance in their retirement account(s) in the first year after retiring, and then withdraw the same dollar amount, adjusted for inflation, every year thereafter for approximately 30 years. The 4% rule is intended to supply a steady stream of income while maintaining an adequate account balance for future years. Assuming a reasonable rate of investment return, the withdrawals will consist primarily of interest and dividends.
Today, some experts disagree on whether the 4% rule is the best option. In my experience, I’ve seen many say that 5% is a better rule in all but the worst-case scenarios. Others caution that 3% is a safer withdrawal rate.
Rule of 10
Financial services provider Fidelity suggests you have 10 times your annual salary saved for retirement by age 67.3 This guideline can help you identify a retirement savings goal, but it doesn’t fully account for how much those savings will cover in retirement.
Rule of 45
Fidelity’s 45% rule says that a retiree’s nest egg should be large enough to replace 45% of their preretirement, pretax income yearly.4 Following this rule, the same retiree earning $100,000 per year would need enough saved up to spend $45,000 a year, in addition to one’s Social Security benefits, to fund one’s lifestyle. Assuming the person lives another 25 years after reaching retirement age, they would need $1.125 million in savings.
Rule of 56
This rule suggests you have 56 times your gross annual salary in life insurance coverage. If you need life insurance, I advise that term insurance is usually (not always) the best type. When deciding how much term coverage to get, multiply your annual salary by 5 or 6, and opt for at least that much total coverage.5 Consider getting even more if you have special life insurance needs, like multiple children, high student loans, or podiatry practice debt.
Rule of 72
Use the rule of 72 to calculate how long it would take an investment to double. The rule of 72 suggests that an investment that earns a 10 percent interest rate will double in 7.2 years. Use this as a starting point for calculating various interest rates and lengths of time, by dividing the number 72 by your interest rate.6 For instance, if you are investing at a more conservative rate of 5 percent, you’d divide 72 by 5 for a total of 15 years (rounded up) for your money to double.
Rule of 78
Paying off a loan ahead of schedule can save you money on interest charges. But if your lender uses the Rule of 78, your interest savings might be less than you expect. The Rule of 78 is different from the more commonly used simple-interest method, which applies your interest rate consistently throughout the duration of your loan. Instead, using the Rule of 78, a lender pre-determines the amount of interest you’ll pay on your loan over its full term. Then, it charges a higher proportion of this amount at the beginning of your loan term than at the end.7,8
In 1992, federal legislation prohibited use of the Rule of 78 on loan terms greater than 61 months. In an effort to protect consumers, some states have also placed additional restrictions on the Rule of 78 or prohibit it altogether.8
The good news is that I note more lenders using a simple-interest formula than the Rule of 78, and some states have outlawed this unbalanced interest formula altogether. Plus, the difference in interest charges might only be a few dollars, depending on your loan amount and interest rate.
Either way, in my observation, it’s a good idea to read over the details of any loan agreement before you sign on the dotted line. That way, you can understand the details of how your loan accrues interest and what your savings will look like if you decide to pay it off early. Be sure to take note of and eschew any potential prepayment penalties, too.
Rule of 115
To figure out how long it would take your money to triple, use 115 instead of the rule of 72. So, at an interest rate of 3 percent, it would take 38 years (115/3), for your initial amount to triple.9
Rule of 50-30-20
The 50-30-20 rule of thumb is a guideline for allocating your budget: 50% to “needs,” 30% to “wants,” and 20% to your “financial goals.”10
The rule was popularized in a book by U.S. Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi. Your percentages may need to be adjusted based on your personal circumstances. And, like all of the above “rules”, it’s only a suggestion for how to plan your budget; it doesn’t actually track your budget for you.
ASSESSMENT
Regarding money “rules of thumb”, the key word is “personal.” There are no one-size-fits-all for your financial life. Everyone is unique.
CONCLUSION
The above represent some common money “rules of thumb” that we all should know, and use, but probably don’t!
Dr. Marcinko was a New York Stock Exchange broker and investment banker for a decade. Later, he served on the Board of Directors of several innovative companies like Physicians Nexus, First Global Financial Advisors and the Physician Services Group Inc; as well as the first healthcare leader for Deloitte-Touche.
References
1. Chen J. Rule of thumb. Definition and financial examples. Investopedia. Accessed May 9, 2025. https://tinyurl.com/3ryjsb7m.
2. Bengen W. FPA Journal - The Best of 25 Years [Determining Withdrawal Rates Using Historical Data]. Financial Planning Association Journal. Published 2004. Accessed May 9, 2025. https://www.financialplanningassociation.org/sites/default/files/2021-04/MAR04%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf
3. Fidelity Investments. How much do I need to retire? Fidelity Viewpoints. Accessed May 9, 2025. https://www.fidelity.com/viewpoints/retirement/how-much-do-i-need-to-retire#:~:text=Fidelity’s%20guideline:%20Save%2010x%20your%20income%20by%20age%2067.
4. Fidelity Investments. 4 rules for retirement savings. Fidelity Viewpoints. Accessed May 9, 2025. https://www.fidelity.com/viewpoints/retirement/retirement-guidelines#:~:text=For%20most%20people%2C%20Social%20Security,after%20accounting%20for%20Social%20Security.
5. Danise A. How much life insurance do I need? Forbes. Accessed May 13, 2025. https://www.forbes.com/advisor/life-insurance/how-much-life-insurance-do-you-really-need/.
6. Kenton W. Rule of 72: Definition, usefulness, and how to use it. Investopedia. Accessed May 9, 2025. https://www.investopedia.com/terms/r/ruleof72.asp#:~:text=The%20rule%20of%2072%20primarily,percentage%20points%20higher%20than%208%25.
7. Banton C. Rule of 78: Definition, how lenders use it, and calculation. Investopedia. Updated March 6, 2021. Accessed May 9, 2025. https://www.investopedia.com/terms/r/ruleof78.asp
8. Mississippi Department of Banking and Consumer Finance. What is the Rule of 78? Accessed May 9, 2025. https://dbcf.ms.gov/wp-content/uploads/2020/06/78s.pdf
9. Swenson C. The rule of 72 and the rule of 115. Accessed May 13, 2025. https://www.wiwealthadvisors.com/wp-content/uploads/2020/01/the-rule-of-72-and-the-rule-of-115.pdf
10. Whiteside E. The 50/30/20 budget rule explained with examples. Investopedia. Updated August 22, 2024. Accessed May 9, 2025. https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp
11. Warren E, Tyagi A. All Your Worth: The Ultimate Lifetime Money Plan [A Guide to Personal Finances]. Free Press; 2006
Additional Resources
12. Marcinko DE. Comprehensive Financial Planning Strategies for Doctors and Advisors [Best Practices from Leading Consultants and Certified Medical Planners]. Productivity Press; New York: 2017.
13. Marcinko DE. Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors [Best Practices from Leading Consultants and Certified Medical Planners™] CRC Press; New York: 2015.
14. Marcinko, DE: Dictionary of Health Economics and Finance. Springer Publishing Company; New York: 2006.
