By: John P. Napolitano, CFP®, CPA, PFS, MST

According to Wikipedia, “A rule of thumb is a principle with broad application that is not intended to be strictly accurate or reliable for every situation. It is an easily learned and easily applied procedure for approximately calculating or recalling some value, or for making some determination”.

This definition is spot on when it comes to financial issues as every situation is different and all conditions; economic, financial, health, family, career are subject to changes as the years go by. Many of these changes are out of your control, but many are also within your control.

The first rule of thumb to throw away is how much money or cash flow you’ll need during retirement. I laugh when I hear that you’ll need X% of your most recent wages at retirement to make ends meet. How ridiculous is that? Since when does your level of earnings have anything to do with what you spend on living? What if your last few years were exceptionally profitable or terribly miserable?

The real answer with respect to retirement cash flow needs is to figure out how much it will cost to live your desired lifestyle. Then factor in wish list items such as travel, grand-kids and whatever else is on your bucket list to get a realistic forecast of what you’d like to spend. Then we see if what you’d like to spend is in line with your abilities based on retirement income and savings. If it is, you’re good to go.  But if your resources appear that they cannot solve for the desired lifestyle then you must work longer, save more and or spend less.

A similar line of thinking can be applied to how much insurance you have. While working, disability insurance coverage should be one of the first areas you examine. Imagine no earnings from work with your living expenses still chugging along with additional medical expenses thrown in for good measure. Don’t rely on any guestimate as to what percent of your income you’ll need to cover, calculate the precise amount and consider obtaining the proper coverage.

Same for life insurance. To hear someone say that X times annual pay should suffice is like saying you know exactly what will happen to dependents after the passing of a breadwinner, homemaker or caregiver. Make a plan to fully cover your family’s financial needs with the proper amount of life insurance or completely understand the lifestyle changes that you are asking a survivor to make after a possible unfortunate event.

Rules of thumb for determining asset allocation may not be appropriate. Your age is a factor in calculating your tolerance for risk, but so are all of the other moving parts of your financial life. Knowing what you need to earn on your investments is critical. If you have excess, then an allocation with potentially no upside may be appropriate. If on the other hand, you can afford to lose big, then a more aggressive portfolio could also be appropriate.

Making Cents is published in GateHouse Media publications every week including the Patriot Ledger.

John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.