When it comes time to retire, there are a lot of important decisions to make. These decisions can be hard to make with so many “rules” that seem to change on a consistent basis. Unfortunately, that is the world in which we live. Things are constantly evolving and changing, and the same is true when it comes to retirement. What was once true for your parents may not be true for you.
For example, it is more likely than not that you will not be retiring with a traditional pension. The days of being able to count on income from a pension are long gone, as employers today rarely provide pensions to their employees. While there are ways today to replace the loss of a pension, the fact of the matter is you can’t count on a pension from your employer like your parents could. Therefore, the rules have changed and you have to work around it.
Here are 4 more rules you need to STOP following when planning for retirement today:
1) The 4% rule is the safest approach to generating lifetime income
Once upon a time, the 4% rule was a popular strategy when it came to generating retirement income. In short, the 4% rule states how much you could safely withdraw from your stock market accounts throughout retirement. It suggests that you could safely withdraw about 4% from your accounts, annually, without running the risk of running out of money in retirement.
What the 4% rule doesn’t take into consideration is longevity risk. People are living longer these days, therefore requiring income for a longer period of time. What happens if you follow the 4% rule and end up depleting your accounts? Wade D. Pfau, Professor of Retirement Income in the PhD program for Financial and Retirement Planning at The American College, states, “the 4 percent rule is likely to fail for recent retirees… It cannot be considered safe in light of the unprecedented market conditions of recent years.”
No one can predict what the stock market will do. As Pfau states, “it would be a great pity if recent retirees scaled down their retirement expenditures and lived a more frugal lifestyle only to find at the end that a higher withdrawal rate could have been more sustainable.”
2) Inflation won’t impact my retirement income that much
I wish I could say this is true, but it just simply isn’t. Inflation will continue to happen, regardless of what the stock market does. To quote a recent Yahoo Finance article,
“It’s true that last year the average Consumer Price Index inflated by only 1.6 percent. But remember the 1970s and 1980s, when inflation more typically came in at 5 percent? In one year, 1980, it went up over 13 percent. Even in the early 2000s, inflation chugged along at closer to 3 percent. So $100 from the year 2000 is today worth only about $72. If you retire at age 66 and expect to live another 20 years, $100 will then be worth only about $64, or maybe less.”¹
3) The stock market is safe and will provide the income I need for the rest of my life
I’m sure you’ve heard time and time again that this is simply NOT true. People want security in retirement, and the stock market is the last place to provide you with that. You don’t want to put your money at risk of being depleted, especially the money you rely on in retirement. Nobody knows what the stock market will do. In retirement, you need to know that your money will always be there.
You need to have the security and guarantee that you can meet your basic living expenses and then some. Relying on the stock market is a mistake if you want predictability and protection in retirement. Rather than allowing the stock market to determine your lifestyle in retirement, you decide how you want to live in retirement by taking control of your money.
4) Social Security, alone, will provide enough in retirement
It would be great if this were true, right? More likely than not, though, it isn’t. For most people, the amount you’ll get from Social Security won’t be enough to support the lifestyle you want in retirement. The checks you’ll receive from Social Security will be nice a supplemental income, but it certainly won’t be enough to provide you with everything you want and need in retirement.
However, there are unique ways you can maximize your retirement benefits and reduce taxes. I talk all about it in my book, “Thinking Outside The Money Box: The Best Concepts And Strategies For A Worry-Free Retirement.” Just fill out the form to the right of this page for free, instant access!
The bottom line is, times are changing. What was true 50 years ago isn’t true today, and you need to consider these things when planning for retirement. You want to get the absolute most out of every dollar you’ve saved.
The only way to do that is by keeping up to date with the changes in the stock market and Social Security, as well as new financial products specifically designed for retirement. Reaching your retirement goals requires a customized strategy, which you should begin building today.
¹ http://money.usnews.com/money/blogs/on-retirement/2015/03/10/dont-fall-for-these-5-retirement-fallacies
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