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3 Retirement Rules You Should Break

By Christy Bieber - Apr 5, 2021 at 9:04AM

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Following them could get you into trouble.

Planning for retirement is hard. That's why it's tempting to buy into "rules of thumb" that make it sound simple. 

You've probably heard these rules dozens if not hundreds of times. But repetition doesn't always make them right.

In fact, there are three big "rules" you probably shouldn't follow -- unless you want to risk ending up with too little money in your later years.  

Older man looking at laptop and papers.

Image source: Getty Images.

Rule 1 to break: Save 10% of your income

Saving 10% of income for retirement is a common suggestion. It eliminates the problem of setting retirement goals, which can be complicated.

Unfortunately, depending on when you start saving -- and how much you earn -- it may not be sufficient.

Here's what saving 10% of income actually looks like

The chart below shows what saving 10% of income would look like, if you:

  • Saved from age 35 to 65
  • Received a 2% annual raise
  • Earned a 7% annual return on investment
  • Withdrew 4% annually from your retirement accounts
  • Aimed to replace 80% of your pre-retirement income
Starting Income Nest Egg Income Produced Income Required
$40,000 $427,073 $17,083 $56,827
$50,000 $533,841 $21,354 $71,034
$60,000 $640,609 $25,624 $85,241
$70,000 $747,378 $29,895 $99,447

Calculations by author.

Social Security alone can't make up the difference. You'll need to invest more to avoid a significant reduction in your quality of life. 

What should you do instead?

Instead of saving a random percentage of your income, use a calculator to set a personalized retirement savings goal. 

Rule 2 to break: Withdraw 4% from your retirement accounts

The 4% rule was devised by a financial advisor named Bill Bengen in 1994. It stipulated you could withdraw 4% of your retirement account balance in the first year of retirement. Then you'd adjust that amount upward for inflation annually.

Theoretically, if you followed the rule, you wouldn't run out of money. But life was a little different back then. Yet people are still using this rule today. 

The creator himself no longer thinks the 4% rule is a good one. Bengen now believes the percentage should be higher. Here's what he said in a 2020 interview:  

It's not a great time to be taking high withdrawals now with the market so expensive, but it's not awful either because inflation is very low. I think somewhere in 4.75%, 5% [range] is probably going to be OK. We won't know for 30 years, so I can safely say that in an interview.

Other experts, however, suggest even 4% is too high. That's because future returns for stocks and bonds are widely expected to be below historical averages. Life spans are also longer than they were in 1994. 

What should you do instead?

A more dynamic approach that responds to changing market conditions is likely a better bet. The Center for Retirement Research suggests using IRS minimum distribution tables to determine your withdrawal rate.

The table below shows what that could look like. 

You could also talk with a financial advisor to develop a personalized strategy. 

Rule 3 to break: Don't invest in stocks as a retiree

Older couple talking with financial advisor.

Image source: Getty Images.

Stocks are riskier than other investments, such as bonds. For that reason, many people believe seniors shouldn't have stocks in their portfolios. 

Unfortunately, without investing in stocks, you're likely to earn a really low rate of return -- typically 2% or less if you invest in bonds or put your money into savings. 

There's a risk to earning returns that are too low. Your money may not even keep pace with inflation.

And you'd be reducing your principal balance far too much with your withdrawals if your account is going up in value by 2% or less annually. 

What should you do instead?

A better asset allocation involves subtracting your age from 110 and investing that percentage of your portfolio in the market. That would mean you'd invest:

  • 50% of your portfolio in stocks at age 60
  • 40% of your portfolio in stocks at age 70
  • 30% of your portfolio in stocks at age 80

Keeping your portfolio balanced based on your age and risk tolerance can help ensure you don't run out of money -- especially if you chose a safe withdrawal rate and have invested enough throughout your career. 

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