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- The rising costs of healthcare, longer life expectancies, and other factors have made traditional retirement more expensive than ever.
- Planning for retirement is not as simple as following a set of rules. You have to look closely at your situation, your income, your goals, and your desired standard of living now and later on.
- It’s time to “retire” some popular retirement advice that no longer makes sense in today’s world.
Rising healthcare costs, the elimination of most private pensions, and our increasingly long lifespans have made the quest for retirement an arduous, taxing journey that leaves many people behind. Most studies show Americans in every age group aren’t saving nearly enough, and our penchant for racking up household debt isn’t helping at all.
As a result, retirement may be drastically delayed for some of us and a total pipe dream for others. There’s not much any of us can do now to change the past, but we can (and should) save and invest more and start treating retirement like a priority.
Perhaps more importantly, we need to abandon old beliefs about what retirement should be. The generous pensions from last century are mostly gone, and we’re left to fend for ourselves.
If you hope to retire on time or at all, here’s some outdated advice you can promptly ignore:
Old advice: Start taking distributions from Social Security as soon as you can
New advice: Hold off on taking distributions
While you can begin taking Social Security distributions as early as 62, Tony Liddle of Prosper Wealth Management says it’s not always the best idea.
“If you take it as soon as possible versus waiting until your full retirement age or ideally waiting until 70, you are giving up on nearly 50% of the possible monthly benefits,” he said.
That’s because Social Security benefits grow the longer you keep from taking them, until you reach age 70. The Social Security Administration says Americans born between the years 1943 and 1954 get 100% of their benefits starting at age 66. At age 67, they get 108%; at age 70, they get 132%. If they start taking benefits early – remember, you can start at 62 – people born after 1951 will get 30% of their benefits.
Taking advantage of Social Security on your 66th birthday may work fine for your 60s when you need more spending money, but you could regret that move in your 70s, when your Social Security payments are less than they could be.
When should you start taking Social Security? Get the answer with this calculator from our partners:
Old advice: You can withdraw 4% of your retirement savings, plus annual inflation adjustments, and make your savings last
New advice: Be more flexible with your plan
Here’s another oldie but goodie – the famed 4% rule. This retirement guideline, which was developed in the 90s, says you should be able to safely withdraw 4% of your portfolio per year, plus cost of living raises to account for inflation, during retirement to make your money last.
The problem? Interest rates were higher back then and the economy was much different.
Brandon Renfro, a financial advisor and the Assistant Professor of Finance at East Texas Baptist University, says that, while the 4% rule was founded on solid principles, retirees in this century need to also consider market conditions, increased life expectancies, and asset allocation.
There’s no perfect substitute for the 4% rule. Even the creator of the rule later refined it to be the 4.5% rule, and has said its effectiveness could change in different situations.
One alternative is the 6% method, which suggests retirees withdraw 6% of their savings at the beginning of the year to cover their living expenses but don’t take any cost of living raises in subsequent years that would increase their annual withdrawal above 6%.
There’s no consensus among experts, though, and generally the most-recommended strategy is to work with a financial professional who knows you and your situation.
Old advice: Once you cover your living expenses with investment income, you can retire
New advice: Expect to need more money than you think
Cover your living expenses with passive income and you can go ahead and retire, right? Wrong.
Financial advisor Nora L. Hartquist from Retire For You says simply covering your expenses isn’t enough in today’s world, and you should really stop and think about inflation, long-term care, spousal survivorship, and taxes.
Hartquist says today’s “affluent” strive to retire early without realising they may need to cover their living expenses for 40 years or more – a span of time in which the entire world can change in ways you don’t always expect.
Are you on track for retirement? Find out with this calculator from our partners:
Old advice: Invest a set percentage of your portfolio in stocks, no matter what
New advice: Consider your risk capacity
Years ago, investors were told to invest a set percentage of their portfolio (usually 100 minus their age) into stocks and the rest in bonds. This means a 60-year-old would invest 40% of their portfolio in stocks and the rest in bonds, then tweak the amounts each year as they move toward retirement age.
Taylor Schulte, financial advisor and host of the Stay Wealthy Retirement Podcast, says this advice could do more harm than good in today’s environment.
People planning for retirement have to consider more than just their age when investing their money. In addition to risk tolerance, Schulte says they should consider their “risk capacity” – or the amount of risk a person needs to take to reach their goals.
On the flip side, “maybe someone has been such a great saver that they don’t need to own stocks at all,” he says.
The bottom line: There’s no one-size-fits all strategy that works for everyone.
Old advice: You’ll probably die young, so plan for retirement accordingly
New advice: Your money needs to last
Finally, we’re no longer in the 1800s. The Centres for Disease Control (CDC) updated its figures last year, citing that most US citizens can expect to live just past age 78.
In other words, retirement funds will need to last – especially if you hope to retire before the standard retirement age of 65.
Ryan Inman, a San Diego financial planner for physicians, says life expectancy should play a huge role in retirement planning, investing decisions, the decision of when to take Social Security, and healthcare planning.
“One of the worst things that can happen financially is to outlive your money, so it’s best to tack on a few extra years to your life expectancy as opposed to planning to live shorter,” notes the advisor. “Create a plan that allows you to live a life you love now while also saving enough so your future self can live just as comfortably.”
Looking for help with your retirement strategy? Use SmartAsset’s free tool to find a financial advisor near you »
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