Retirement might seem far away, but it’s closer than you think. Each day brings you one step closer to leaving the workforce forever. It’s important to keep this in mind, so you can prepare appropriately. One way to make sure you’re prepared is to avoid following hard-and-fast retirement rules. Not all rules apply to everyone, and some rules and assumptions are simply outdated. Here are 10 retirement rules and assumptions that definitely do not apply anymore.
1. I won’t outlive my money if I withdraw 4% a year
When deciding how much to spend each year during your retirement, financial experts generally recommend the 4% rule. This means you withdraw 4% from your portfolio during the first year of your retirement and then gradually adjust your withdrawals each year based on inflation and current market conditions. This rule does not work for everyone, particularly if your portfolio contains more high-risk investments than your average index funds and bonds.
In addition, life has a strange way of ruining your plans. Anything could happen that might give you no other choice but to withdraw more than your planned 4%. This is even more of a possibility if your emergency savings account is lacking or nonexistent. Life expectancy also plays a role, especially because people are living longer these days. Have a back-up plan for your back-up plan, and make sure you continue to fund your emergency savings. Treat the 4% rule as a general guideline, and always prepare for the worst.
2. My partner will take care of me
No matter how strong your union is today, there’s no guarantee you’ll still be married by the time you retire. The so-called “gray divorce” is becoming more common. The divorce rate for adults who are age 50 and older has doubled over the past 25 years, according to Pew Research Center. So prepare for the possibility that you will no longer live in a dual-income household during your golden years. You might have to learn how to tough it out on your own. Although a significant drop in your household income will happen anyway if your spouse dies, it will happen a lot quicker if you decide to divorce.
3. I will start saving early and rely on compound interest
Investing early so you can benefit from compound interest is a smart way to go. The earlier you start saving and investing for your retirement, the better. However, it takes much more than starting early and relying on compound interest to have enough saved for life after work. You’ll also need to consider the cost of living for your city and state, investment fees, taxes, and inflation.
4. I will live off my pension forever
Your employer might have promised a certain amount of income for the rest of your life in the form of a defined benefit plan, but you could be in for a surprise. Some state pension plans are in crisis, and that could affect your retirement income.
In addition, some private employers are doing away with their pension plans altogether. If you plan to stay with your employer for a set number of years so you can qualify for the pension, you might be wasting your time.
If your employer goes bankrupt, the Pension Benefit Guaranty Corporation protects your pension. However, depending on your situation, it’s possible you might not get every dollar you expected, certified financial planner Jeff Rose said on his blog, Good Financial Cents.
5. I’ll rely on Social Security
Relying solely on your Social Security benefits isn’t realistic. If it’s still around when you plan to leave the workforce — the trust fund for Social Security benefits is estimated to be drained by 2034 and only able to pay 79% of promised benefits — don’t count on it being your only source of income. Your expenses would need to be incredibly low for this to be possible. This is because benefits are, on average, equal to just about 40% of what you earned before retirement, the Employee Benefit Security Administration said.
6. Retirement means never working again
Life can bring many unexpected events. There’s no guarantee retirement will mean relaxing until you die. If you hit hard financial times that deplete your emergency savings, you’re facing a mountain of high-interest debt, or you find yourself getting a late-life divorce, you might have to return to the work force. There’s always the possibility the amount you’ve saved isn’t enough to sustain your lifestyle due to unexpected expenses. In this case, you might have to supplement your income with a part-time job or even go back to work full time.
7. I’ll just work until I die
Improvements in health care and technology mean you might live longer, but that doesn’t necessarily mean you’ll be healthy enough to work. You might become disabled or chronically ill before you’re ready to retire, so work hard to save as much as you can now. Roughly 1 in 4 of today’s 20-year-olds will become disabled before they have a chance to retire, according to the U.S. Social Security Administration.
8. My expenses will be lower in retirement
Certain expenses could be close to the same, and some might even be higher during your retirement. As you age, your health tends to decline, so you could face higher medical bills. A 65-year-old couple who retired in 2016 would need roughly $260,000 to cover their health care costs during retirement, according to Fidelity’s Retiree Health Care Cost Estimate. This is about 6% higher than the 2015 estimate of $245,000.
9. $1 million is my retirement number
Don’t just pull a popular number out of thin air, and declare that to be your retirement target. The amount of money you need to retire depends on several factors. Among them are the lifestyle you wish to live, where you choose to live, inflation, and life’s emergencies, for starters. Meet with a financial professional, so you can get a more accurate picture of what it will take to retire within your desired time frame.
10. I’ll spend retirement traveling and playing golf
A comfortable retirement doesn’t just happen. You’ll have to make the proper preparations if one of your retirement goals is to travel and spend time golfing with your friends. It’s important for you to gain knowledge of the retirement number that will allow you to live the life you want. You can do this by meeting with a certified financial planner. You can also take advantage of the several online retirement tools available.