3 Retirement Secrets You Need to Know

Your dream retirement may be easier to attain than you may think, and here are three reasons why.

Jul 27, 2014 at 9:00AM

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.

Retirement

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.

Retirement Crown Flick Steven Dipolo

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 The 4% rule is outdated and a little too conservative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 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.

Beach Flickr Neilsphotography

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.

Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Johnson & Johnson, and Procter & Gamble. The Motley Fool owns shares of Johnson & Johnson and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers