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4. To retire comfortably, your investments must generate 70% to 80% of the income you received while working.
Not a bad idea, but too many critical factors are being ignored (again). Retirement needs are a function of life expectancy, good or bad health, inflation and spending, not previous salary. Living a jet-set lifestyle requires a lot more money than staying home and watching television; failing to generate enough income can force retirees to give up activities that would make their retirement years more enjoyable.
"Most folks who hit 65 these days -- if they wait that long to retire -- are finding that they have more energy and more desire to do more things, and they need to plan on a higher level of spending in the early years of retirement," says Rick Brooks, the vice president of investment management for Blankinship & Foster, a Solana Beach, Calif., advisory firm.
"Sixty-five is the new 55, where folks still have energy, they have resources and they are no longer shackled by the 9-to-5-job thing. While those conditions will change over time, someone who doesn't replace all of their income may draw down too much early and then may be in a position where they outlive their assets."
5. The stock market will give you a 10% annual return.
This is a fuzzy interpretation of the famous Ibbotson-Sinquefield stock market study, research that showed the stocks deliver an annualized average return of 10%. The problem is that Roger Ibbotson, the guy behind the study, now says that he expects the next 25 years to be different from the past 75, with returns closer to 8%.
Moreover, the 10% number includes several assumptions, such as a long time horizon, no active trading, no taxes and no transaction costs. That's hardly the real world.
Also, many people forget that the historical returns are an average, not an annual total. When people live by this rule and make it their expectation, they tend to be disappointed, which makes it tough to stick to an investment strategy.
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6. Life insurance benefits should equal five times your current income.
Critics say this is a longtime insurance industry marketing ploy, while supporters call it an honest benchmark. Either way, it's usually off-target; a key problem, again, is the focus on income rather than expenses.
Experts say the five-times-income rule applies to the sole breadwinner in a family with two kids. That makes it inadequate for larger families and a waste for people yet to start a family. Like most financial rules of thumb, this rule's suitability is a function of your personal situation.
Rather than relying on income, a more accurate formula for many consumers will be to insure what they can't afford to pay for without coverage. That means taking their mortgage balance, the kids' college education and four or five years' worth of expenses to allow your loved ones to get back on their feet emotionally.
7. Refinance your home when interest rates drop by 2 percentage points.
This rule came from the era where the points -- the fee paid to lenders for making the loan -- and closing costs associated with a mortgage refinancing took years to pay off. Today, there are many available mortgages with little or no closing costs.
As a result, consumers can get long-term savings by shaving half a percentage point or more from the mortgage, or by keeping the rate but shortening the loan's duration.
The consensus of the experts: Work the numbers. You could be wasting money waiting for rates to fall further before you make a deal.
This article was reported and written by Chuck Jaffe for MarketWatch.
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