As an investor, you may encounter many different rules of thumb throughout your investing journey, notes Thandi Skade of financial services firm Allan Gray. These can help you figure out how much you’ll need to invest to avoid outliving your retirement nest egg.

Skade, investment writer at Allan Gray, explains why it’s important to be mindful and consider your personal circumstances.

Here are some examples of rules of thumb:

The rule of 120

The Rule of 120 is a calculation that uses your age to determine the supposedly appropriate asset allocation for your investments.

The formula tells you to subtract your age from 120 to find the percentage of shares you should own.

For many, this may make sense, given that the older you get, the more your ability to take risks diminishes.

The 4% rule

Since the mid-1990s, this has been applied universally as a rule of thumb for determining the appropriate drawdown rate and asset allocation for retirees.

This suggests that if you withdraw 4% of your capital the first year of your retirement and only adjusting for inflation each year thereafter – and provided you maintain a minimum 50% allocation to equities – the risk of outliving your retirement savings over a 30-year period is significantly reduced.

The Rule of 72

Another popular formula provides an estimate of how long it will take for an investment to double in value.

The Rule of 72 suggests that in by dividing 72 by the interest earned on your investment each year, expressed as a percentage, you will get a number that represents the number of years it will take for your investment to double.

Add a pinch of salt

While these rules of thumb provide us with a starting point to guide our thinking and planning, the problem with them, and other statements that equate averages with certainties, is that they are inherently based on assumptions and assumptions. measures applied to the average person or “typical circumstances”.

The notable flaw of rules of thumb is therefore that they cannot take into account the unique circumstances of each investor.

Consider two 35-year-old investors who are both married with two children and plan to retire at age 65. Thabo is the breadwinner with a housewife. Mark has a salaried wife with dependent parents and relatives. While Thabo and Mark’s investment backgrounds are similar, their profiles are clearly very different.

As an investor facing larger short-term financial obligations, Mark’s risk appetite would likely be more cautious than Thabo’s, given that Thabo’s circumstances potentially place him in a better position to absorb the short-term market shocks.

If the Rule of 120 were applied to Mark and Thabo’s profiles, both should have 85% of their portfolios invested in stocks, but given Mark’s responsibilities, this allocation may not be appropriate. Nor is Thabo’s situation without risk.

As the sole breadwinner in her household, the consequences of illness or job loss could have a devastating impact on her family – a factor that will also influence her appetite for risk.

And what about investors who start saving for retirement late in life? A formula that reduces the risk of your equity exposure as you age may not be the optimal choice. This is why, when it comes to investing, rules of thumb should always be taken with a pinch of salt.

This goes for even the best-known rules.

While the 4% rule may be a good starting point for retiring investors, the formula may not apply to all investors. For example, those planning to delay retirement and work longer might not need an income for 30 years, while others would prefer to start with a higher tax rate and reduce their real income over time. time by taking increases below inflation.

Over the past two years, we have witnessed, and many have experienced, how unexpected events or phenomena, such as the Covid-19 pandemic and the global ramifications of the Russian-Ukrainian conflict, can alter our financial situation drastically.

For retirees, unforeseen expenses could force some to deviate from inflationary increases, and fluctuations in returns could mean some might need to cut income increases due to low returns, and vice versa when strong returns are generated.

With the rule of 72, it is impossible to predict what the future rate of return might be. A much better approach to doubling your investments would be to increase your contributions where possible and leverage the power of compound interest to grow your investments.

Rather than anchoring yourself to formulas that may not be appropriate, focus on the aspects of your financial plan that you can tweak and change to give you a better chance of retiring comfortably. Resources like Allan Gray’s Investment Calculator can help you figure out what your current investments might be worth in the future.

It is also advisable to consult a good independent financial adviser, who can help you develop a financial plan that takes into account your personal situation, financial obligations and personal inflation.

• By Thandi Skade, Investment Writer at Allan Gray

Read: How much money do you need to retire comfortably in South Africa, according to experts