We all like to know what the rules are. Do this, and you can expect that to happen. The same is true with retirement. Many of us want to know what asset allocation to use, and how much to set aside for a successful retirement.
There are many rules of thumb when it comes to retirement. While they can be helpful in terms of making general plans about what to do with your portfolio, it's not a good idea to rely on such rules of thumb too much. They are often too general, and don't always match your individual needs. Here are three rules of thumb to avoid relying on as you plan for retirement:
1. You need $1 million-- or $2 million-- to retire successfully. One of the biggest misconceptions is that you need a specific amount of money saved up to successfully retire. For a long time, the magic number was $1 million. Now some experts say that you need $2 million to retire. However, it's not so much a specific number you need to focus on.
Instead, it's more important to figure out how much money you think you will need each month, and work on developing income streams that provide that amount. You can do this by building a nest egg, developing alternative income streams to supplement your savings, or with a combination of these strategies.
2. It's safe to draw 4 percent from your retirement accounts. We generally hear that you can withdraw 4 percent from your retirement account each year in order to sustain your money indefinitely. The thought is that, with the right return, this withdrawal rate will allow you to beat inflation and meet your needs without tapping into your principal.
However, it's important to realize that market conditions can make this rule of thumb unsustainable. Instead, you need to evaluate your situation regularly. You might need to withdraw less during times of volatility and down markets. Additionally, if you aren't worried about keeping your principal untouched, you might be able to get away with a slightly higher withdrawal rate. Consider your individual preferences and needs, and adjust your withdrawal rate accordingly.
3. Life expectancy is about 78 years.
For someone born today, life expectancy is age 78.2, according to the Centers for Disease Control and Prevention. Many of us figure that we will live to 80 or 85 years at the longest. However, once you make it to 65, there is a good chance you'll make it even further. The Society of Actuaries suggests that there is a 17 percent chance that a male age 65 will live to reach 95, and a female has a 23 percent chance.
As you can see, you will need your money to last for a longer period of time. Many people figure they will need enough retirement funds for 20 years, when, in reality, you are more likely to need that money for 30 or even 40 years, depending on when you retire.
Look ahead, and plan for the possibility of living longer than you imagined. It's fine to use rules of thumb as a starting place for retirement planning, but don't rely on them too much. Remember to tweak them to reflect your circumstances.
Jeff Rose is a certified financial planner and U.S. combat veteran. He blogs at Good Financial Cents and Soldier of Finance.
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