Lynn Hopewell, one of the pioneers of the financial planning profession, once said, "Rules of thumb are for people who want to decide things without thinking about them." Chuck Jaffe (a columnist at MarketWatch) recently wrote an article titled, "Seven Rules of Thumb That Make Little Sense." He was referring to the blanket advice that is often given to consumers, such as: subtract your age from 100 to determine the percentage of stock in your portfolio; plan on spending 75% of your current income during retirement; purchase five times your annual income in life insurance; save 10% of your income while you are working. I'm sure that we are all familiar with these and other rules of thumb and, hopefully, none of us use them in our practices.

There are, however, some "rules" that some advisors use in dealing with their clients that I may categorize as "rules of dumb" because they may dumb down our profession and, as Hopewell observed, may not require much thinking. Among some of these rules are:

A safe withdrawal rate is 4% of your portfolio improved by inflation each year.

While this rule has created many fine articles and discussions, it is our experience that it is extremely impractical to implement when one is planning for the future. To begin with, how does one calculate inflation? Do we use the CPI? Most of the research that I have seen does so.

The problem is that, while the CPI (as controversial a measure as that is) measures price movements for the country, it probably has little effect on our clients. The inflation they experience is unique to their own circumstances, and if one is to use an inflation factor it needs to be the only one that matters to our clients-the increases in their standards of living. Has any advisor ever received a call from a client to request a rise in their monthly withdrawals to coincide with the exact percentage change in the CPI? If not, why do we use this as a rule? Planning for each individual's situation and reviewing it on a regular basis is the only rule that we believe should be applied when determining what a safe withdrawal rate is.

Wealthy people don't need financial planning and middle-class people can't afford it.

I recently read an article written by a journalist who has extensive experience and has covered our profession for many years. In this article, he stated that there was a paradox for financial planners. He claimed that the people who need it, the middle class, cannot afford to pay advisors for planning. Those who can afford it, the "wealthy," don't need it. I must disagree with him on both counts. There are many fine financial planners who bill for their services hourly and specialize in middle-class clients. One need only look at what the Garrett Network has accomplished.
To suggest that wealthy people do not need planning is simply to not understand what planning is. Apparently, some advisors believe that financial planning is retirement planning and that those who have accumulated large sums of money don't need to plan for their current and future cash flows. However, the wealthier the individual, the more complicated his or her issues are. Assuring that clients' estate plans, tax plans, investments, business plans and other issues are coordinated and reviewed periodically is extremely important to clients with wealth. To assume they don't need financial planning is, in my opinion, ludicrous.

High allocations to fixed income reduce risk.

I suppose that depends on how one defines risk. At our firm, we define it as running out of money before you run out of life. If a major allocation to fixed income will produce returns that virtually assure that a client will deplete his portfolio in his lifetime, how can one define that as a low-risk portfolio? Adding the appropriate allocation to equities may create more fluctuation, but it could reduce the risk of running out of money. Before allocating a portfolio, one must not only measure our clients' "risk tolerance," but the return necessary to achieve their goals.

Be sure and harvest tax losses at the end of each year.

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