You've surely been told that saving for retirement is important, but if you follow bad advice, you could wind up setting yourself back. Here are three dangerous guidelines you'd be best to ignore in the course of your planning.
1. Follow the 4% rule
The 4% rule was developed in the 1990s and says that if you begin by withdrawing 4% of your savings balance your first year of retirement and then adjust subsequent withdrawals for inflation, your nest egg should last 30 years.
But the 4% rule makes a lot of assumptions. First, it assumes strong bond yields, which may have been the case back in the 1990s but isn't the case now. Second, the rule assumes a fairly equal mix of stocks and bonds, but if your portfolio leans conservative, your investments may not generate enough of a return to allow for a 4% withdrawal rate.
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Finally, the rule assumes you want or need your savings to last 30 years, but what if that's not the case? What if you're retiring in your late 50s and have a family history of living until close to 100? Or what if the opposite is true -- you're retiring in your 70s and only expect to live until your mid-to-late 80s?
In either scenario, a different withdrawal rate may be far more appropriate. Therefore, while you can use the 4% rule as a starting point when determining what savings withdrawal rate to establish, you shouldn't automatically assume it's the right rate for you.
2. Dump your stocks
Seniors are generally advised to steer toward safer, conservative investments for retirement, like bonds. And while that's a smart thing to do to some degree, you shouldn't take it to an extreme. Rather, you should still aim to have a good 30% to 60% of your portfolio in stocks during retirement, depending on your risk tolerance. In fact, the 4% rule assumes that a reasonable portion of your portfolio will be in stocks, as opposed to your assets being in only bonds and cash.
Now you're probably thinking, "Didn't you just tell us to ignore that rule?" And that's true. The point, however, is that stocks can play a pivotal role in generating retirement income for you, so you can't dump them completely.
3. Assume your expenses will decline dramatically
Seniors are often told that their living costs will drop substantially once they no longer have a job to go to. But when you think about it, that makes little sense. The cost of holding down a job generally entails commuting expenses and incidentals like dry cleaning and maintaining a business wardrobe. Ending your career, therefore, won't make life a whole lot less expensive -- it'll only shave a little money off your monthly budget.
Of course, if you manage to pay off your mortgage prior to retirement, that will make more of a difference. But don't forget that your mortgage is only a portion of your housing expenses, and that you'll still have property taxes, insurance, maintenance, and repairs to deal with during retirement.
As such, don't follow the line of thinking that retirement will be an inexpensive period of life. Some seniors wind up spending just as much money, or almost as much, during retirement as they do when they're working. Rather than make assumptions, take the time to think about where you'll live in retirement and what your lifestyle will look like. From there, you'll be able to run some numbers to get a better sense of how much to save.
Planning for retirement is a multiyear process, and one that can be easily derailed by misinformation. Get the facts straight about retirement so you don't wind up unhappy once your career comes to an end.
