by Tyler Curtis
Saving for retirement is one of the most daunting tasks the average person will face during his or her lifetime; because of this it comes as no surprise that everybody seems to have a different strategy for dealing with the problem. While there is no one correct solution for retirement planning, many widely accepted theories have been created that may not be entirely true. It is important to thoroughly analyze all the pieces to your retirement plan and make sure that your plan is build on a strong foundation. Here are a few widely acknowledged, yet often misleading pieces of retirement advice.
The 4 percent withdrawal tenet is an easy set it and forget it approach. Many financial plans are based on the principal that 4 percent of retirement savings can be withdrawn each year during retirement. This strategy is far from bulletproof. Using the 4% withdrawal rate with a traditional portfolio, you are much more likely to run out of money before you run out of breath. A recent T. Rowe Price study put the 4 percent withdrawal rate to the test by simulating a portfolio of 55 percent stocks and 45 percent bonds. In the 10,000 Monte Carlo simulations ran by the researchers, retirees ran out of money within 30 years in 71 percent of the scenarios if the first several years of withdrawals happened during a bear market. For a more in depth look at the 4% withdrawal rate read our white paper The 4% Withdrawal Fallacy.
Your home is a major investment for retirement. Up until recent years many people have felt that their home is a great long-term investment. Even after the housing crisis you will hear people who say the house they live in will be a good asset to draw from if it is entirely paid for. However, unless you are able to sell off your house and not worry about where you will be living, your house will be an illiquid asset that will not net you much unless you are able to downsize significantly. In most cases the moving and transaction cost associated with buying and selling your home will significantly eat away at the net benefits of downsizing.
Your portfolio stops appreciating in retirement. Just because the contributions into your retirement plan stop when you reach retirement, that doesn’t mean your portfolio stops growing. In a well devised retirement plan that is meant to last for decades of retirement your portfolio should grow for a number of years past retirement age. It is crucial for your retirement plan to allow for some growth beyond your annual distributions in order to keep pace with inflation and not affect your standard of living.
You will only need 70-80% of your pre-retirement income during retirement. The truth is that attempting to estimate the amount you will spend during retirement is complex and unique to each individual. According to the Employee Benefit Research Institute 52% of retirees surveyed spent 95% or more of their pre-retirement income during retirement. This makes sense given that many retirees end up replacing their work lifestyle with expensive, active lifestyles. Using a rule-of-thumb like “70% of pre-retirement income” as a retirement budget can hardly qualify as a ballpark estimate. The smarter alternative is to assemble a budget based on your personal situation and goals for retirement. Then, stress test those figures with various inflation assumptions. We have put together a financial planning tool to help with this daunting task.
There are many things to consider when planning for retirement, but don’t worry you are not alone in this process. We at Snider Advisors are always happy to offer an initial free consultation to help guide you in the right direction.