Does the Rule of 70 Actually Work for Retirement? | Breaking the Retirement Planning Myths

Hey, I'm Casey Weade, CEO and founder here at Howard Bailey Financial, also a certified financial planner practitioner. And we're here to discuss inflation. We talked about a lot of rules of thumb.

If you didn't see the first three rules, watch those videos, go back, consume that because they all kind of tie in together and culminate into what we're going to talk about today. This rule of 70. Now, if you have any questions throughout this video, drop them down in the comments section.

I'd love to personally address each and every one of those questions. If you have ideas for future videos, you want me to create a video just for you. I may just do that if you give me an idea by dropping it down in that comment section.

So what is the rule of 70? The rule of 70 is something a lot of financial planners will leverage to get you concerned about inflation or help you understand how inflation will impact you depending on the inflation rate we use over your retirement horizon and inflation. It's something we should be concerned with as we step into retirement. And one of the ways that I like to help retirees understand inflation and what happens over time, sometimes I'll ask an audience of pre-retirees, retirees who have quite often bought their homes 30, 40, 50 years ago, even, and I say, well, what was the value of that home that you first purchased? They almost always know what that number is.

You probably remember that number. Now, what was the cost of the last car you bought? Well, that's inflation. And that means it is something that we should plan for in retirement, but the way we plan for it, it needs to be unique to you.

And we're going to talk about that spending patterns in retirement, how you spend in retirement and how that evolves over a 20, 30, 40 year retirement. It's going to change a lot. That needs to be taken into consideration rather than these linear projections that we so often see.

The rule of 70 says, take your inflation rate and we're going to take 70 divided by that inflation rate. And that's how long it's going to take your expenses to double in retirement. But we have to be careful with this rule of thumb.

In this scenario, we're using 3%. We're using 3% because that's a standardized number that's used for most financial plans. And most financial planning software kind of defaults to that 3% inflation rate because that is the long run historical average of inflation.

We've went through the seventies, we've seen higher inflation. We went through the early two thousands, we saw lower inflation. And so this is a number that's pretty accurate historically, just a little higher than that.

And that means that if you are going to use a 3% inflation rate, your expenses will double every 23 years. So 23 years from now, your expenses are going to double. But is that realistic? Because this is how we're planning.

Let's say as you step into retirement, you're spending $10,000 a month and you're 60 years old. That means your expenses over 23 years will double to $20,000 a month. Now, how old are you? You're 83 years old.

I've never sat down with a couple that said, Oh, that makes sense. When I'm 83, I'll be spending $23,000 a year because they go, no, I'm not going to spend that much. When I reached that point.

Now there's also something for us to consider here. If you're spending $10,000 a month for most individuals spending $10,000 a month, they have a lot of discretionary spending built into there. So a lot of things like the country club membership, going out to eat, maybe a second home even, and a lot of those things are going to drop off or change over time.

It's not realistic to assume that 10,000 months going to turn into $20,000 a month when you're in your mid eighties. So we need to take into consideration those spending patterns. One of the ways that some of our clients will choose to do that is they want to kind of ratchet those things down.

Rather than spending $23,000 a month when I'm 80, I'd rather spend $20,000 a month today and spend $10,000 a month when I'm 80, maybe we take it the other way around and we spend $20,000 a month and we ladder that spending down over time. Again, that could be customized to you. Maybe instead of inflating it from 10,000, $20,000 a year, you just say, I'm going to spend at a level $15,000 a year.

I'm going to get to get to enjoy those dollars today. On the other hand, maybe you have a spending pattern that's going to increase month over month or year over year in that first 10 year window, 15 year window of retirement, but then it's going to levelize. As we said, the golf club membership might drop off.

Maybe we go to a smaller home, maybe we go to one car instead of two cars. We start planning to make some lifestyle changes down the road. These spending patterns need to be diligently studied.

We need to build a budget that's as unique as you are. Some of those numbers should be inflated. Some of them shouldn't be inflated.

Some of those numbers should inflate at different rates than other expenses or other line items that you have. And so we want to customize that for you to build your very own unique personal financial plan. We'll walk you through this process.

All you have to do is call the number on your screen for a complimentary personal financial review. We'll make sure that we walk you through these rules of thumb and you don't stumble along the way.