Five Retirement Mistakes You Can't Afford To Make: Mistake #2
Mistake #2: Blindly Following A Rule Of Thumb
“The percent of your portfolio in bonds should equal your age;” “Withdraw 4% of your portfolio each year and your money will last the rest of your life;” “You will only need 80% of your working income once you retire;” “Once you retire you need to be very conservative with your investments;” “Pay off your mortgage before you retire;” “Never fight a land war in Asia.” All of these “rules of thumb” have some grounding in reality, but each of them may also lead you astray if you blindly follow them (well, maybe not the last one)
The fact of the matter is that according to the Social Security Administration, the average 65 year-old can expect to live to his or her mid-80s, and one-in-four will reach the mid-90s (women, on average, outlive their male partners). You need to be planning for a 20 to 30 year retirement, and at a 3% rate of inflation $100,000 of income today will only be worth only $57,000 20 years from now. In fact, 30 years from now you will need to have increased your income by 2 ½ times just to maintain your standard of living! Getting too conservative early on in your retirement can be a recipe for disaster later in life, when you least have the ability to make changes.
Conversely, you want to be able to live the retirement life you’ve always dreamed of, and not just worry about the future. Depending on how investments perform, starting with a 4% withdrawal rate may leave you on your death bed with significantly more assets than you started your retirement with. While you heirs may be happy to receive the inheritance, nobody wants to look back on their life and realize that they could have afforded to do more things, and have more meaningful experiences, but they didn’t out of fear of running out of money.
Rules of thumb may work for the “average” retiree, but you are not average. You are a unique individual (or couple) and your retirement plan should reflect your unique vision and values. Don’t sell yourself short by taking the easy way out!
