As long as people have been working they at some point retire. Well at least since the advent of Social Security in the US. Before then, retirement was a hit and miss depending on your circumstances. In today’s workforce people are retiring and enjoying in some instances many decades in their retirement years. As people are living longer and longer, it is no wonder that many of the retirement advice is given in the past may need to be revisited in today’s market conditions. So let’s look at four old school trains of thought that should be revisited before you get too far along in your retirement or its planning.
The old school of thought was in retirement you should go with a 60% stock position and 40% in bonds. While that may have been an okay strategy in the 70’s 80’ or even 90’s it is no longer a valid one in my opinion as it may not produce enough money to live for your entire retirement. As people are living longer, they need to not only preserve their principal but in the most instance, they need to continue to grow it in their retirement years. An 80% stock and 20% bond portfolio will allow this to occur for you and possibly save you a lot of worries. With bond prices at historic lows, equities are the key to your retirement and its success. On a historical basis, stocks have always performed well over a ten-year period so the risk is not as great as you think it may be. With ETFs and indexed funds, you can invest in safe manners in equities without the risks of individual stocks.
In years past some planners suggested that you should use your age to determine your portfolio mixture. That meant someone who was 30 had 30% of their portfolio in bonds. Meanwhile, someone who was 70 should have 70% of theirs in bonds. As you can see this goes against the first rule that we examined and allocated more and more of your portfolio to bonds as you age and in today’s environment of bonds paying extremely low-interest rates that are a recipe for disaster. If you were to allocate your portfolio by your age and increase bonds each year you are almost assured, you would run out of funds in your retirement because you are not generating additional principal. And with longer retirements this is something that needs to be done if we are to not exhaust or savings.
And here is another older piece of advice that needs to be addressed as well and that is you can withdraw 4% of your portfolio in retirement and not run out of savings. While this may have been the case 20 plus years ago, it will not serve you well in today’s environment at all. In recent years, many portfolios have not returned 4% on an annual basis meaning you are dipping into your principal, and that can lead to running out of funds while you are retired or hamper you leaving funds to your heirs. A better strategy is to evaluate each year and make your withdrawals based on the current market condition at that time.
And finally, with the start of 401(k) plans and self-directed IRAs, people were in charge of their retirement for the first time for the majority of people. But that is not always the best thing for people if they are not sure of themselves or feel comfortable dealing with their finances. However, in today’s world of finance, there are numerous 401(k) plan administrators that will evaluate your situation and make recommendations for you to follow, and they basically set these up on autopilot for you. This seems to work well for the majority of people who do not want to take the time to understand the plan and take the time to research their investment options on their own. But these plans are only as good as the people who put them together, and that also involves that you are upfront and honest with the advisor in your position in the way of all of your financial endeavors.
For more information you may contact me directly or leave a comment here in the blog.