The financial services industry loves catchy mantras. Unfortunately, some of its most popular personal finance rules are outdated, misleading, or just plain wrong.
Many originated decades ago, when financial planning was a less sophisticated discipline. Others were created to simplify complicated concepts. The problem is that consumers often mistake these rules of thumb for empirically supported financial wisdom.
Here are five that deserve to be retired.
1. “Buy on the Dip”
Every time the stock market declines, financial commentators encourage investors to “buy on the dip.” Who doesn’t like buying something on sale?
But buying on the dip is market timing. It encourages investors to believe they can identify attractive entry points and profit from short-term market fluctuations.
How do you know when a dip represents a buying opportunity rather than the beginning of a prolonged bear market? And if you’re holding cash waiting for the next dip, what happens if the market keeps rising?
Decades of research support disciplined, long-term investing over attempts to time the market. Regular contributions to diversified, low-cost index funds provide a sensible strategy. Investors with substantial available cash should develop an investment plan rather than wait indefinitely for a correction.
Successful investing doesn’t require predicting market declines. It requires the discipline to ignore short-term market noise.
2. “Probability of Success”
Few financial planning concepts create a greater illusion of sophistication than Monte Carlo analysis.
Financial advisors routinely use simulation software to generate thousands of hypothetical market scenarios and present clients with a “probability” that their retirement plans will succeed.
A 90% probability sounds reassuring. A 50% probability may induce panic. But what do these numbers actually mean?
Monte Carlo simulations are mathematical models, not crystal balls. Their results depend heavily on assumptions about investment returns, volatility, inflation, correlations, spending, and longevity. Small changes in assumptions can produce dramatically different probabilities.
Worse, many traditional retirement models assume relatively static spending patterns and portfolio allocations over periods extending 30 years or longer. That’s not how people live. Retirees adjust spending. Tax laws change. Markets evolve.
The greatest problem isn’t Monte Carlo simulation itself. It’s presenting the resulting probabilities as meaningful predictions of a client’s financial future. Too often, it’s garbage in, garbage out.
Research on dynamic retirement distributions, including work by Justin Fitzpatrick and Derek Tharp at Income Lab, supports a more adaptive approach. In my experience, financial planning is better approached through ongoing annual analysis and optimization rather than relying on a single long-term probability.
3. “The 60/40 Portfolio Is Ideal”
For decades, the 60/40 portfolio was revered by the investment industry. Stocks provided growth while bonds supposedly provided stability.
For much of the period from 1980 through 2020, this combination worked remarkably well. But there was a powerful tailwind that rarely received sufficient attention: declining interest rates.
Falling rates produced substantial capital appreciation in bond funds, fostering the impression that allocating 40% to bonds reliably provided stability.
That gravy train ended when interest rates reached historic lows. The experience of 2022 should have been a wake-up call. Stocks and bond funds declined together, exposing the vulnerability of supposedly conservative portfolios.
The lesson isn’t that bond funds are inherently bad investments. It’s that bond funds do not offer the same maturity-date principal certainty as individual Treasuries or insured CDs held to maturity.
At Financial Planning Hawaii, we prefer individual Treasuries and CDs for the stable portion of clients’ portfolios, using dynamic bond laddering rather than arbitrary fixed allocations.
Instead of recommending a particular stock/bond mix, we generally advise retired clients to set aside five to seven years of anticipated portfolio withdrawals in risk-free assets to protect against prolonged stock market downturns.
There is nothing magical about 60/40.
4. “The 4% Rule Is the Gold Standard”
When financial planner William Bengen introduced his retirement withdrawal research in 1994, it was groundbreaking.
His research suggested that retirees holding diversified portfolios could historically withdraw approximately 4% of their initial portfolio value, adjusted annually for inflation, without exhausting their savings over 30 years.
Importantly, Bengen’s work inspired decades of subsequent research into retirement spending.
That research also exposed a major weakness: rigid adherence to the 4% rule can be highly inefficient. In many historical scenarios, retirees following the rule underspend throughout retirement, leaving substantial wealth to their heirs.
Subsequent research, including the influential Guyton-Klinger withdrawal strategies, introduced dynamic spending models using guardrails and decision rules. More recent work by Fitzpatrick and Tharp has advanced this approach further.
These strategies recognize that retirement spending should respond to changing market conditions, portfolio values, and personal circumstances.
The 4% rule deserves recognition as a historical milestone. But treating it as the gold standard for managing retirement spending today is difficult to defend.
5. “Spend Taxable Accounts First, Then IRAs, Then Roth IRAs”
Of all the outdated financial mantras, this one may be the most costly.
Conventional wisdom has long suggested that retirees should spend taxable investment accounts first, followed by traditional IRAs, and finally Roth IRAs.
The rationale is straightforward: allow tax-advantaged accounts to grow as long as possible.
Unfortunately, this largely ignores our progressive income tax system.
Consider a recently retired couple with substantial traditional IRA balances but little taxable income before Social Security and required minimum distributions begin.
Following the conventional sequence could mean missing opportunities for IRA withdrawals or Roth conversions at relatively low tax rates.
Years later, they may face substantial required distributions, higher income taxes, increased Medicare premiums, and potentially higher taxes for a surviving spouse.
A better strategy may involve withdrawals from taxable accounts, traditional IRAs, and Roth IRAs in the same year.
The objective isn’t minimizing this year’s taxes. It’s optimizing lifetime taxes while considering Social Security, Medicare IRMAA surcharges, capital gains, and estate planning.
There is no universally optimal withdrawal sequence. There is only an appropriate strategy for each household, revisited annually.
The Bottom Line
For centuries, physicians prescribed bloodletting with leeches to treat illness. In the 19th century, even young Theodore Roosevelt reportedly received medical advice involving cigars for his asthma.
Fortunately, medicine has advanced considerably.
Financial planning has evolved too, yet outdated rules of thumb continue to be repeated as though they were timeless truths.
These five mantras may someday be viewed much like leeches and medicinal cigars: curious historical relics that persisted long after better approaches became available.
For consumers’ financial health, that day cannot come soon enough.
