Don’t Follow the Rules

woman in a field

Time was when retirement seemed almost predictable: 65 was the golden year; you adjusted your portfolio according the classic 100-minus-your-age formulation, and so on.

Do any of the old rules still apply in this crazy new economy?

While it’s true that no one can predict what you should do to fund the ideal retirement, or insure that your money will last, it is time to revist three old rules-of-thumb in light of new economic realities.

New Rule # 1: Retire between 65 and 70

If you’ve been dutifully socking the maximum into a 401K since your early 20s, you may well have accumulated enough to retire comfortably by age 65. According to Mari Adam, President of Adam Financial Associates in Boca Raton, Florida, the ideal amount would be 10 to 12 times your income as of your retirement.

For many of us, though, achieving that by 65 is going to be a stretch. But if you work an extra five years you have a much better chance of reaching your goal. (And working longer is not a bad idea anyway, considering that the average life expectancy for someone retiring at 65 now is well over 90.)

The first and most obvious benefit to making 70 your target retirement age, “is that you’ve got five more years to catch up on your 401k contributions,” notes Anthony Webb, a research economist at the Center for Retirement Research at Boston College.

Because you’ve likely got fewer large expenses at that age—you’re probably done paying for your kids’ college bills and (ideally) your mortgage—you might be able to contribute the maximum ($22,500 a year) to your 401k.

The second good thing is that you collect more in Social Security benefits—about 40% more than you would have if you had retired at 65.  

Another upside, says Webb, is that you’ll of course have five fewer years that you’ll be drawing down on your nest egg.

But what if you find that as you get nearer to your 60s you’re not so keen on the prospect of hanging out at the office for five more years?

Start brainstorming about part-time work that would allow you to retire at 65 or 66, but still bring in income. Ultimately, “it’s not the money, it’s the life,” that should guide you, notes CFP Mari Adam.

New Rule #2: Be flexible about the 4% standard

For years, the traditional advice has been to draw down no more than 4% of your total nest egg per year. With a $1 million stash, each year you would take out $40,000 (adjusting upward for inflation) as income.

Theoretically, by withdrawing only 4%, your nest egg would replenish itself over time. Then you would a) have extra cash in case of a major expense (like a medical crisis or prolonged illness) and/or b) you might be able to pass on a large portion of your savings to your heirs.

Adam still recommends the 4% rule. “It’s not perfect, but it’s simple to understand,” she says, and it’s a good benchmark for many people.

Webb, however, thinks it’s a risky rule to follow because it doesn’t require you to respond to real-life market returns.

Say, for instance, that you had retired with that million-dollar nest egg right before the stock market crashed in 2007. You would have started off by correctly drawing down $40,000. But by 2009—when your nest egg had shrunk to about half its original amount—you might have continued withdrawing $40,000, with disastrous results.

The Center for Retirement Research’s recommendation, says Webb: Follow the IRS’s Required Minimum Distribution (RMD) tables when calculating how much to withdraw each year. This is the minimum amount that the government requires you to withdraw from your retirement plan accounts, beginning at age 70 ½.

The RMD percentages aren’t all that far off from 4%. At age 70, you’d withdraw 3.65%; at age 75, 4.37%, at 80, 5.35%. But because your withdrawal is calculated anew each year, the amount you can draw down to live on will also depend on how your portfolio has fared in the stock market.

New Rule #3: Rethink your asset allocation

One rule-of-thumb for figuring out how much of your portfolio should be in stocks (as opposed to how much should be in bonds) has been: Subtract your age from 100 and you’ll get the percentage that you should invest in stocks.

Of course, now that people’s life expectancy is edging up to 100, the formula’s going to need some tweaking, right?

According to Eleanor Blayney, author of Women’s Worth: Finding Your Financial Confidence, because women are living longer and may not have been able to save as much as they need to for retirement, it makes sense for them to revise the formula: to 115 or 120 minus your age.

That means that at age 55, instead of having 45% of your portfolio in stocks, you might have 65% in equities. That will give you a little more growth, but it does mean taking on a little more risk as well.

That’s why one of the most important factors in applying any rule to your asset allocation is to take your blood pressure into account. What’s your tolerance for risk? 

Retirement rules and formulas can be comforting—some are quite useful. Your job in retirement, however, isn’t to follow the rules. It’s to be a savvy retiree, weighing the odds and the current information to make choices that will preserve your assets for as long as you live.


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