998. How much do you really need to retire? Should you always buy term life insurance? In episode 998, Money Girl Laura Adams audits 8 popular financial rules of thumb to see if they hold up in today’s economy.
998. How much do you really need to retire? Should you always buy term life insurance? In episode 998, Money Girl Laura Adams audits 8 popular financial rules of thumb to see if they hold up in today’s economy.
What you’ll learn:
Don't follow a rule just because it's famous—follow it because it works for your life.
Find a transcript here.
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The world of personal finance is full of common rules of thumb and shortcuts designed to make managing money easier. But do they actually help you build wealth, or are they outdated relics for a different generation or economic era?
Today’s post will review some popular financial rules, which ones are still gold standards in 2026, and which ones you should probably ignore. You’ll learn how to customize them to fit your actual life and money goals.
Welcome back to Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, my Substack newsletter. You can learn more at LauraDAdams.com.
This is episode 998, which means we’re sneaking up on the one-thousandth Money Girl podcast–I can’t believe this huge milestone is on the horizon! I’m planning a special show and want to feature comments from listeners like you. Please leave a brief voicemail at 302-364-0308 to let me know what Money Girl tip has most stood out to you over the years! You may hear yourself on the show! And thanks.
8 money rules of thumb
Back to the episode. Here’s what you should know about eight common money rules and whether they’re actually true or false.
1. Your emergency fund should equal three months of expenses.
This rule can be true or false, depending on your stage of life and financial situation. I think most experts recommend building a cash reserve equal to three months of expenses because it’s better than one month and more attainable than six or twelve.
However, you’re the only person who genuinely knows the right amount of emergency cash to keep in the bank. If you’re the sole earner in a household with many expenses, or you don’t feel confident about the future of your industry or job, building a larger emergency fund is wise. Losing your income or getting injured could become a huge financial hardship for you and your family.
If you’re retired and not dependent on earned income to pay the bills, having an emergency fund typically isn’t as important. However, you may want a cash reserve to cover large or unexpected expenses, such as buying a new car or an expensive home repair.
In addition, retirees should maintain a cash cushion for a different reason: sequence-of-returns risk. That’s the risk of the market going down right as you need to take withdrawals from your investment portfolio.
When you’re in the "accumulation phase" of life while working and saving, a market dip is actually an opportunity to buy investments at a discount. However, once you enter the "distribution phase" (retirement), a market dip combined with regular withdrawals can cause your investment balance to decline too quickly.
To avoid selling investments when their value is down, a good strategy for retirees is to keep a percentage of their portfolio in certificates of deposit (CDs) or short-term bonds. That way, if your stocks or stock funds decline, you can spend from a cash bucket instead. That allows you to wait for a rebound in the financial markets.
Whether you’re a new graduate who needs to keep a month or two of living expenses on hand, or a retiree who wants a year’s worth of cash in case the market dives, there’s no right or wrong rule. I hope your takeaway is that you need to understand the potential risks for your situation and reduce them as much as possible by keeping some cash on hand.
2. You should contribute enough to max out a retirement plan match.
This rule definitely holds if you have a workplace retirement plan that matches your contributions. A match is a 100% return on your money, which is just too good to pass up!
For example, assume your employer matches 401(k) retirement contributions up to 4% of your wages. If you earn $100,000 and contribute $4,000 (4% of your wages), your employer will deposit an additional $4,000. Just like that, you turned $4,000 into $8,000, a 100% return.
Be aware that some workplace retirement plans have a vesting schedule, where you must remain employed for a predetermined period before you take ownership of an employer’s matching funds.
In other words, if you leave the company before being fully vested, you may get to keep some or none of it. So, it’s only guaranteed to return 100% if you meet any vesting requirements.
However, you’re always 100% vested in the contributions you make from your paychecks and their potential investment growth.
LISTEN ALSO: How to maximize 401(k) matching funds
3. You know when your money will double using the rule of 72.
This rule isn’t magic, just math. It’s a true rule that allows you to estimate how long it will take an investment to double, given its average return. The rule says that if you divide 72 by the rate you expect to earn, the result will be the number of years to double.
For example, if your investment earns an average of 6%, you’d divide 72 by 6, which equals 12. That means at 6%, you’ll approximately double your money in 12 years.
Or, if your investment returns an average of 7.2%, dividing 72 by 7.2 is 10. That means it would double in a decade.
Note that the rule of 72 isn’t accurate for unreasonably high rates of return. But for interest rates below 12% per year, it’s an excellent and accurate rule of thumb for estimating the future value of investments.
4. Your portfolio stock allocation percentage should be 100 minus your age.
While this rule of thumb could be true or false depending on your tolerance for investment risk, I generally don’t recommend following it. The idea is that as you get older and closer to a target retirement date, you should take less investment risk. That’s wise, but the “100 minus your age” rule is likely too conservative.
For example, if you’re 55, subtracting your age from 100 leaves 45. The rule says you should devote 45% of your investment portfolio to stocks or stock funds. The remaining 55% would go to less risky investments, such as bonds or cash. That might be a good allocation if you plan to retire soon and are somewhat risk-averse.
But let’s stay you’re 35. The rule of thumb says you should have 65% (100 minus 35) of your portfolio in stocks. Most financial planners would say that’s way too conservative for a young person and recommend a much higher percentage of their portfolio be invested in stock funds so they put it to work. In general, young investors have plenty of time to benefit from long-term market growth; therefore, they should allocate most of their investments to stock funds.
Even a 70-year-old retiree may want to allocate a relatively high percentage of their investments to the stock market. That’s especially true if they have ample fixed income from Social Security benefits or a pension, expect to live decades longer, or want to leave money to heirs.
RELATED: How can I become a confident investor?
5. You need life insurance worth ten times your income.
This rule of thumb may be true or false, depending on your goals and your beneficiary's needs. If you make $100,000, the rule says you need $1 million in coverage, a simple and easy guideline to follow.
While purchasing ten times your annual income in life insurance may be appropriate for some people, it’s an incomplete calculation for many. Imagine Bob, who’s 35, earns $100,000, rents an apartment, has no debt, and has a nonworking spouse. A $1 million life policy is likely total overkill. Bob might need half that amount, depending on his spouse’s ability to earn an income if he died.
Let’s say Linda is 45, earns $100,000, is recently divorced, has a $500,000 mortgage, and three minor children that she wants to send to college. A $1 million life policy would barely cover the mortgage and future college expenses, leaving her children with almost nothing for daily living expenses if she passed away. She might need twice that amount, depending on the value of her assets, savings, and investments.
Therefore, instead of using 10 times your income, consider the DIME method when buying life insurance. Here’s how it breaks down.
Add up any of the DIME needs that apply to you, and consider your current assets, such as savings, retirement accounts, and homes that would pass to your heirs. You may find that your target life insurance number is higher or lower than ten times your annual income.
So, don't let this rule of thumb dictate your family's safety net. If you’re unsure how much life coverage you need to protect your loved ones or leave a legacy, speak with a licensed insurance agent.
6. Buy term insurance and invest the rest.
The meaning of this rule is that term life insurance is better than a permanent life policy. While that might be true for many people, there are situations in which this rule is false and permanent coverage is the best solution.
With a term policy, you purchase coverage for a period, such as 10 or 20 years. If you die during that time, your beneficiary receives the policy death benefit. But permanent life pays a death benefit no matter when you die. In addition, most permanent life insurance policies build a cash value that the policyholder or beneficiary can use.
Let’s say you want your heirs or a charitable organization to receive a certain amount of money, no matter how much money you have left, and no matter your age, when you die. In that case, permanent life is a great solution for achieving that goal.
Permanent life can also help heirs pay anticipated estate expenses and taxes after your death. That could prevent them from having to sell estate assets to pay a large tax liability.
While permanent life isn’t a product that everyone needs, don’t disregard it. It can be a powerful financial tool for ensuring that your family or business partner won’t experience a financial crisis after your death.
LISTEN ALSO: Should I convert a term policy to whole life?
7. You need to save 25 times your income to retire.
When you hear someone say you need a certain amount to retire comfortably, it’s typically not a rule of thumb that’s true for everyone. There’s no magic number of savings and investments that applies to all of us because our circumstances and goals are different.
Some workers have sizable pensions or Social Security benefits that will cover some or all of their expenses in retirement. That means they may need much less in investments than someone without guaranteed income sources.
For instance, if a couple has $70,000 in Social Security retirement income between them and one spouse has a lifetime pension of $40,000 per year, they have $110,000 of guaranteed income per year. In addition, Social Security benefits increase annually with inflation.
If this couple has $100,000 of total annual expenses, including income taxes, they have enough income. They may be able to retire and live comfortably on their guaranteed income, even saving about $10,000 a year.
But let’s say a single person wants to spend $100,000 per year in retirement and expects $40,000 in Social Security benefits, with no other guaranteed sources of income. They need to generate an additional $60,000 per year to bridge the gap between their income and expenses.
So, how much do they need to save to retire comfortably? Well, the answer depends on many variables, such as their retirement age, life expectancy, investment growth, and risk tolerance.
However, a back-of-the-envelope calculation is to multiply the annual income needed by 25. For my single retiree example, that would be $1.5 million in investments ($60,000 x 25) when they start retirement.
The multiplier of 25 comes from another common rule of thumb that I’ll cover next.
RELATED: 7 retirement rules changing in 2026
8. You can withdraw 4% of your retirement portfolio each year.
The 4% rule says that typical retirees who need their retirement nest egg to last about three decades can usually withdraw 4% annually. This rule of thumb is a great starting point, but it could be true or false based on your portfolio.
This rule is based on research from the early 90s that analyzed stock, bond, and inflation data from the 20s. It assumed you would start retirement with an investment portfolio comprising 50% large U.S. stocks and 50% U.S. Treasury Bonds, and rebalance each year to restore a 50/50 stock-to-bond allocation.
The study assumed a retiree would withdraw X% of their portfolio at the start of retirement, and then increase (or decrease) the distribution amount each year by the amount of inflation (or deflation) for that year. It found that there were no 30-year periods where a retiree would have run out of money by withdrawing 4% annually.
In reality, few retirees withdraw from their portfolios exactly as the research assumed. Income needs change as your lifestyle and health change.
In addition, not every retiree has a 50% stock and 50% bond allocation that mimics the 4% rule study. However, there’s still significant value in considering the 4% rule as a data point in retirement planning.
For example, if the single person in my previous example has $1.5 million of investable assets at the start of retirement at 65, the 4% rule says a $60,000 annual withdrawal, with inflation increases each year throughout retirement, is likely to ensure they never run out of money.
The 4% rule may not be perfect, but it gives you a good idea of what’s reasonable. For instance, if you have $1 million and want to retire at 65 with $80,000 solely from your investments, that would be an 8% withdrawal rate, which is likely much too high to sustain for 30 years.
I previously mentioned the rule that you need to save 25 times your income for retirement. If you wondered who came up with 25, it’s actually the 4% rule in reverse.
If you need an income of $60,000 in retirement, multiplying by 25 gives you a target of $1.5 million. And the 4% rule says that if you have $1.5 million, that portfolio can typically support annual withdrawals of 4% or $60,000 without running out of money over three decades.
I hope this helps you understand some popular money rules of thumb and when they may or may not apply to you. Remember that most rules are general guidelines and benchmarks to help you see if you’re on track to achieve goals, like building enough savings and retiring. If you're unsure how they apply to your financial goals, speak with a financial advisor, such as a retirement planner or insurance professional.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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