- There’s a lot of common advice you’ll get when planning for retirement.
- Some of the rules that work for most people may not work well for you.
- Consider your own unique situation when doing your planning.
In the course of planning for retirement, you may come across certain rules that you’ll be advised to stick to. You may even see that those rules have been in place for quite some time and have worked well for many retirees before you.
Be that as it may, there are certain retirement rules you shouldn’t be worried about breaking. Here are three that you can ignore if your circumstances warrant it.
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1. The 4% rule
For years, financial experts have sworn by the 4% rule, even though, at this point, it’s actually quite outdated. The rule says that if you begin by withdrawing 4% of your savings your first year of retirement and then adjust subsequent withdrawals for inflation, your nest egg should last you 30 years.
It’s a good rule in theory, but here’s why it may not work. For one thing, it assumes you’ll enter retirement with a fairly equal split of stocks and bonds in your portfolio. You may, in reality, have a more aggressive portfolio that favors stocks, or a more conservative portfolio consisting mostly of bonds.
The rule also assumes you want your savings to last 30 years. Americans are living longer these days, and if you retire early, you may need 35 to 40 years of savings. Or, you may decide to retire later on in life, in which case you may not need your nest egg to last as many years.
The point, therefore, is that there may be a better withdrawal rate for you than 4%. Think about your needs, goals, life expectancy, and investment mix when making that decision.
2. Not filing for Social Security before full retirement age
You’ll often hear that claiming Social Security before reaching full retirement age, or FRA (which is either 66, 67, or somewhere in between), is a bad idea because doing so will slash your monthly benefit for life. Now that last part is true — filing early will result in a lower monthly benefit. But that doesn’t mean you have to wait.
If you’re coming into retirement with a giant nest egg, then you may be just fine to sign up for benefits at age 62, which is the earliest age you can file, and get your money sooner. Similarly, if you don’t expect to live a long life, then filing ahead of FRA could actually result in you getting a higher lifetime payout from Social Security, even if your benefits come in lower on a month-by-month basis.
3. Saving enough to replace 70%-80% of your former income
You’ll often hear that it’s best to assume you’ll need to replace 70% to 80% of your former paycheck if you want to live a comfortable lifestyle in retirement. But that assumes that you generally spend the bulk of your earnings.
Say you earn $100,000 a year but live frugally (in a manner you enjoy) and only spend $50,000 a year on living costs. In that case, there’s no reason to assume you need an annual retirement income of $70,000 to $80,000.
On the flipside, you may have lofty goals for retirement. Perhaps you’d like to travel the globe or pursue other interests that eluded you when work took up most of your time. If that’s the case, you may need to plan on replacing more than 70% to 80% of your former paycheck. Think about your specific needs and plans when mapping out your savings goals.
Some rules are meant to be broken, and these three certainly fit that bill. While it’s okay to read up on retirement planning rules, it’s also important to recognize that no two seniors are the same, and that what may work for the general public isn’t necessarily what’s best for you.