Traditional wisdom says you should save 10% of your salary for retirement while you’re working, and withdraw just 4% of your investments every year once retired. However, like any game, those rules have changed over the years.
The factors governing the typical retirement process have shifted much more quickly than people realize. And some retirement rules that were once considered standard practice are now obsolete.
Take the ‘4% withdrawal rule’ for example. New research suggests that 4% is not a safe systematic withdrawal rate in today’s low interest rate environment.
So what do you do? How do you know which retirement planning rules are still relevant, and which ones are hopelessly outdated?
Here’s a breakdown:
Old Rule: Save 10% of your salary for 40 years
New Rule: It depends
While it’s handy to rely on a certain percentage for retirement savings, it’s also unrealistic to think this rule applies to everyone.
If you haven’t been saving for 40 years, you’ll need to put in much more than 10% to catch up. And if you’re hoping for early retirement, use a retirement calculator to see how much more money you’ll need to contribute to the pot. A quick Google search for ‘retirement calculator’ will turn up a bunch of good options.
Old Rule: Withdraw 4% of your nest egg in retirement
New Rule: Create a personalized plan
The Old Rule worked better when it was less common for people to live into their 90s. But now people are living longer, and they need more money to get them through. If you rely on the standard 4% rule, you could run out of money early.
Current retirees should create a Withdrawal Policy Statement (WPS) that will dictate their withdrawal rate and what to do if the market tanks.
Since circumstances can easily change, this WPS should be re-examined every five to seven years. A WPS may also help keep you calm when there’s a market bust, and reduce anxiety about the state of your investments if that happens.
Old Rule: Keep your money in bonds as retirement nears
New Rule: Have a strong mix of stocks in your portfolio
Many people associate stocks with high risks, which are inappropriate for a retiree’s portfolio. However, stocks just may be your only hope against inflation.
In today’s investment environment, retirement coaches suggest keeping a 75/25 mix of stocks and bonds in your portfolio.
With that said, it’s still important to be diversified within your stocks, so don’t assume that converting your portfolio to a few big tech companies will provide you with the insulation you need. Adding stocks to your portfolio may seem scary, especially if you’ve been primarily focusing on income securities, so, please, ask a professional’s advice.
Talk to a certified financial planner about how you can incorporate stocks, and which picks are right for you portfolio. They can help you incorporate some New Rules into your financial planning so that you don’t get caught short later on.