Reflection No. 47

Portfolio Balancing and the 25x Rule

There’s no shortage of “rules” in personal finance, but this morning we’re focusing on two that can really help guide your planning. We’ll look at a rule of thumb for balancing your portfolio so your investments match your goals and risk tolerance and cover a simple way to estimate how much you might need in retirement.

Three Quick Hits:

  • Article: A Balanced Portfolio

    Where do you start when figuring out the right portfolio split? A common rule of thumb is 120 minus your age. This results in the percentage of your portfolio you might keep in stocks with the rest in bonds. This approach gives your investments enough growth potential from stocks while keeping some stability from bonds so you’re not getting out over your skis. Of course, you should always reflect on your own risk tolerance, goals, and time horizon to make sure your portfolio is truly balanced for you.

  • Tip: If you’re signing up for a free trial, be sure it doesn’t quietly turn into paid fees. Mark your calendar or set a reminder to end the trial before it renews.

  • Quote: “Do not save what is left after spending, but spend what is left after saving.” - Warren Buffett 

Two Questions:

  • When was the last time you felt truly in control of your money and what helped you get there?

  • What would you do differently if you treated your personal finances like a business?

REFLECTION No. 47: The 25x Rule of Retirement Planning

I - Issue: What is the 25x rule in retirement planning?

R - Rule: The 25x rule is a simple retirement formula where you take your expected annual spending in retirement and multiply it by 25 to estimate how much you need to save.

A - Analysis: The 25x rule complements the 4% rule, which suggests that if you withdraw 4% of your portfolio per year, in retirement, your funds should last at least 30 years, assuming a balanced portfolio of stocks and bonds. So let’s say you plan to spend $60,000 a year in retirement. This means you'll need around $1.5 million saved. However, the 25x rule doesn’t factor in Social Security, pensions, or changing expenses over time. It’s a rough estimate to provide a good starting point, but it’s not a fully polished financial plan. Market downturns, rising healthcare costs, and other unexpected expenses are not to be forgotten. And, if you retire early, need higher withdrawals, or want to leave a legacy, you may need a bigger cushion.

C - Conclusion: The 25x rule won’t solve every retirement puzzle, but it gives you a solid starting point. Big-picture thinking now means fewer surprises later.

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