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3 Retirement Secrets You Need to Know

According to a new study by Boston College's Center for Retirement Research, more than half of U.S. households are at serious risk of not having enough money to retire comfortably.

flickr/ 401(k) 2012

While it's true Americans are not the best savers in the world, and a good portion of our population won't have enough, I really don't think the retirement situation is as bad as experts might have you believe. What I mean is the formulas most experts use to determine retirement needs overestimate the requirements and underestimate how much income can be produced from a set amount of savings.

Here are three things to think about that can help you form a realistic goal for your retirement nest egg.

1. You might not need as much as you think
Experts have slightly different opinions of how much income you'll need to maintain your lifestyle in retirement, but 75-85% of your pre-retirement income seems to be the consensus.

This is by no means accurate for everyone, especially people who are good about saving money. For example, if you are in the habit of setting aside 15% of your income between IRAs, 401(k) accounts, and other savings methods, you're already living on just 85% of your income.

Plus, you have certain expenses before you retire that are either drastically reduced or go away entirely in retirement. Just to name a couple of examples, consider how much you spend on gas driving to and from work. Or, how much did you spend on business clothes last year? The point is, some expenses naturally become much lower in retirement.

flickr/ steven dipolo

When you factor in the amount you currently save for retirement, and the expenses you'll no longer have, your actual income requirement could be much less than experts will have you believe. For many people 60-70% of pre-retirement income is more than adequate to maintain your lifestyle.

2. The 4% rule is outdated and a little too conservative
This is one of the most quoted "guidelines" by financial planners. Basically, the "4% rule" says that if you withdraw 4% of your retirement savings each year and adjust for inflation annually, you should have enough money to last for the rest of your life.

Quite frankly, there is no reason you shouldn't be able to earn more than 4% annually on your money, even with extremely conservative strategies. Even the safest-of-the-safe 30-year U.S. Treasuries yield about 3.25%, and you can invest your money in an investment-grade corporate bond fund, like Vanguard's Long-Term Corporate Bond ETF (NASDAQ: VCLT  ) and earn over 4.4% with extremely low risk.

You could also buy preferred stocks, which are similar to bonds and nearly as safe, that pay 5-7% annually. And you could put a small portion of savings in certain income funds which can pay even more.

The point is, you should be able to withdraw 5% of your money and still be able to replenish it and then some every year.

3. Stocks are the way to go for most of your savings
If you're not retired yet, stocks are probably the place to be. One of the mistakes a lot of pre-retirees make is getting too conservative, too fast with their portfolio.

The simple reality is that stocks outperform any other asset class over any long period of time. It's true that you should tone down your risk as you get within a few years of retiring, but if you're under 55 and have more than half of your assets in bonds or other low-risk, low-reward assets, you may want to take another look at your strategy.

Many investors automatically equate the word "stocks" with "risk", but that's not necessarily the case. Solid blue-chip stocks such as Johnson & Johnson, Procter and Gamble, and Coca-Cola have extremely low volatility and average double-digit total annual returns.

So, how much do you really need to retire like you want to?
That depends on you, but it's likely not as much as you've been told. And don't forget to count things like Social Security and a 401(k) or pension when figuring out how much income you'll generate in retirement.

flickr/ nielsphotography

Your comfortable retirement is probably much more attainable than you may think, and the best thing you can do is to start saving early and often and let your investments earn you as much money as possible.

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Read/Post Comments (5) | Recommend This Article (11)

Comments from our Foolish Readers

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  • Report this Comment On July 27, 2014, at 12:54 PM, jlh939 wrote:

    This is a good article. I would like to see more focus on busting the myth of the 4% rule, especially for those of us SINKs (Single Income, No Kids) who plan to spend what we have saved.

  • Report this Comment On July 27, 2014, at 1:07 PM, SailorKane wrote:

    Finally an article with some balance, instead of these dumb articles that encourage you to work until 70 to get higher SS payments.

    I had a corporate job at high pay until 2003, then took 5 years retirement, then in 2009 went back into the workforce at a reduced-pay job that I enjoy a lot. Both the financial debacle of 2008 and my boredom led to rejoining the workforce. I can throttle up or down the level of work and level of income. I'm 64.5 years old now. My investments have recovered from the 2008 problem.

    I'm aiming to take SS and retire again in January 2016 at full retirement age. And work a pretty full schedule until then, probably making all total $75K in 2015, including work, wife's SS already triggered, corporate pension, and IRA payments.

    How much do I need? Certainly much less than when I was in the corporate job. No kids now. No mortgage. No debt. Lots of insurance. Low cost area (Florida) for taxes. No desire for the latest BMW. Fixed expenses about $2000/month, mostly cell bill, cable bill, food, insurance and RE taxes. I am very comfortable with retirement income around $60K--room for travel and fun. Even $50K would be enough. $75 is very very comfortable. I think using a % of your work income is dumb. I think its much better to build your budget from bottom up, including a historical average for "mad money" (new clothes, computers, toys, travel). Then when you get close to retirement, live on that amount for a year or two to see if you have it right. In most cases you will adjust your spending to match your income anyway, as long as you have enough to meet your basic needs. So I totally agree with the article on this point.

    I also agree with the article on buying stocks. I have most of my investments in stocks, probably 70%, but have anchored the IRA with some individual long bonds A rated or higher (mostly AA, AAA). Luckily I purchased them when interest rates were higher and most are 25-30 year bonds. Because of this I have been able to withdraw 6% annually for 10 years and still have more money in the IRA than I started with. So I also agree that 4% is a bit conservative. In my case 6% is working fine. 5% certainly should be OK as a working number. Especially if you have enough buffer to back down to 4% if the financial market tanks.

    When I fully retire (again) in January 2016, I will still probably work my part time job for perhaps $15K/year (about 10 weeks work). It involves travel and I enjoy it, so it'll be like a vacation. If I do that, my income will come from pension (small), IRA, my SS, wife's SS (spousal benefit: 50% of my SS), even some unemployment since I will continue to work, and 5% of my "reserve fund". Grand total around $100K. For working about 10 weeks a year at something I really enjoy.

    Only debate I'm having is whether to fully retire in January 2015, instead of waiting the additional year to 1/2016. I would sacrifice some future income, esp SS, but start retirement a year earlier. One option that doesn't work is to trigger SS 1/2015, before FRA, and continue to work a full schedule. Math is terrible, between 85% of SS payments being taxed and the SS giveback of 50% of earnings over 15,600, you basically lose money if you earn too much while taking SS before age 66. Depending on your tax rate you could actually LOSE up to 30% of each dollar you earn, on the margin.

    Right now my plan is to work to 1/2016, but position myself to retire earlier if something happens. Something could be: health issues of me or wife ( both healthy now), republicans gaining control of senate and passing some bad legislation cutting SS (there are already articles targeting the spousal benefit), or me getting fed up with part time job, or some other opportunity catches my eye. With the current political situation, I will certainly NOT wait past 1/2016. Way too much risk of SS being hammered by Republican leadership. Way too much risk of health issues--me or wife--cutting short the "Golden years".

  • Report this Comment On July 27, 2014, at 1:40 PM, Blackhawk wrote:

    Sailor Kane,

    Go for it when YOU AND WIFE feel comfortable.

    No other way, my man!!!!

  • Report this Comment On July 28, 2014, at 7:10 AM, reddevil wrote:

    Again, incomplete, "sound byte" advice that unfortunately is all to common in these type articles.

    FIrst of all the comments "and don't forget to count social security.." Don't Forget ?? I'm planning for my retirement... How can I forget ? Also the 4% rule might be outdated- very true but for the exact opposite reason you outline here.. It may be too high. Ask people who were already retired and living through the 2008 financial crisis if they felt comfortatble drawing down 4% of their assets while the value of their assets dropped 10-25% or more. Plus people are living longer thus the assets need to last far longer than in the past. The most dangerous piece of advice- but bonds and fixed income investments that earn way more than 4%. Potentially lethal advice. Making the exact wrong move- reaching for yield in the face of a potentially rising interest rate enviornment over the next few years. You'll see your assets drop 10-20% or more depending on the duration of the bonds. No, No No. Just a warning to readers- to tread carefully when it comes to financial advice. Free investment advice if often worth exactly what you pay for it.

  • Report this Comment On July 29, 2014, at 12:21 PM, jpanspac wrote:

    The 4% rule is based on solid research and fundamental math. This article is based on hand waving and vague assumptions.

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Matthew Frankel
KWMatt82

After several years as a high school math teacher, Matt brought his love of teaching and investing to the Fool to help people invest better. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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