The retirement rules your parents or grandparents might have had in their minds as they saved for their futures may not work well for you. Times have changed, as has some thinking about how to prepare for retirement.
Here are some rules that may not serve you well, despite many people believing them.
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1. Retire with a million dollars
This rule certainly sounds like plenty of money — but it might be too little or too much for you. We’re all different in how much we spend, how long we might live, and other factors. Inflation matters, too. If you’re 35 and aiming for a million dollars, it might only have the purchasing power of $400,000 by the time you’re 65. So crunch some numbers to see what a more reasonable goal is for you.
2. Save 10% of your income
This is another nice, round number, but much depends on how old you are, when you plan to retire, and how much you’ve already got socked away. Many of us need to be saving and investing 15% or even 20% of our incomes, if we can — especially if we have some catching up to do. (Tax-advantaged retirement accounts such as IRAs and 401(k)s can help here, and they feature “catch-up” contributions allowed for those 50 and older.)
3. Retire at 65
Many people imagine retiring at 65, and many retire even earlier than that. It’s great if you really can afford to do so, and some people end up retiring early, not because they want to. Keep in mind, though: You might live to 95 or beyond. If you retire at 65, will your retirement income support you for 30 years?
4. Delay claiming Social Security regardless of your situation
Various studies have found that most people will maximize total benefits by delaying claiming Social Security until age 70. But depending on your health and needs, starting earlier can make sense. Also, some who are worried about Social Security’s surplus running dry are considering starting earlier, too.
5. Use the 4% rule when withdrawing money in retirement
The flawed, but still helpful “4% rule” suggests that retirees can withdraw 4% from their nest egg in their first year of retirement and then adjust subsequent annual withdrawals for inflation. (There are other retirement withdrawal strategies to consider, as well.) It can help you think about your withdrawal strategy, but it isn’t best for all people or at all times. If you begin retirement right after a big market crash, for example, it will be best to take as little out of your shrunken portfolio as possible.
6. Live off only interest
Interest rates have not always been as low as they have been in recent years. In the 1980s, there were some double-digit interest rates available. Having a sizable nest egg and living just off the interest was possible for many. But with the average six-month CD rate recently at 1.5% and other interest rates similarly low, this is no longer a great strategy.
7. Keep 100% minus your age in stocks
It’s best not to sell out of all your stocks in retirement, because stocks tend to deliver faster growth. And after all, if your retirement lasts 30 years, much of your money will be remaining invested for a very long time. But how much should you keep in stocks? One rule of thumb was to subtract your age from 100%. So if you were 65, you’d keep 35% of your portfolio in stocks. Many experts today suggest starting with 110%, though, to give you more exposure to stocks for longer. If you’re a risk taker, you might up that to 120%. If you’re skittish, perhaps stick with 100%.
8. Aim to retire with 10 times your salary saved
This is a somewhat arbitrary number, because it’s not clear which salary — your highest one? Your most recent one? Also, you might need more or less than this amount. Instead of using a rule like this, carefully estimate how much you’ll need in retirement and how you’ll amass it.
9. Aim to have 80% of your preretirement income in retirement
Similarly, don’t assume you’ll need 80% of your current income in retirement. You might need more if you plan to travel a lot. Or you might need less, if you’ve just paid off your home and don’t have costly hobbies.
10. Retire with your mortgage paid off
This is a good goal to have, but not everyone can achieve it. Definitely try to pay off any debts featuring high interest rates before you retire, though.
11. Retire and stop working forever
Finally, don’t assume that you’ll retire and then never work again. It can be powerful to work a part-time job in your first few years, to let your nest egg grow a bit more as you tax it less. You might even enjoy keeping a side gig you love for a long time — perhaps tutoring kids, giving music lessons, or knitting and selling sweaters.
Each of us is different, with different situations, preferences, risk tolerances, health conditions, likely longevities, and so on. So take the time to draft your own solid retirement plan — and then execute it.