How does your strategy stack up to these myths?
Time flies. Before you know it, your retirement years will be right around the corner. Whether you’ve been working with a financial professional or diligently saving towards retirement on your own, there may be some ideas you’ve been taking for granted. Touted as conventional financial wisdom, some retirement- focused conversation points are actually outdated myths that you might want to reexamine.
Read on to learn about three erroneous assumptions many people hold, and what savvy investors should think about instead.
Myth 1 - I'll retire when I choose.
Many people assume they will exit their career on their own timetable. In fact, this is one of the most prevalent retirement myths. Workers often assume they’ll retire at 65 and continue to work part- time in retirement while gradually transitioning to fully-retired status.1 But for many, this couldn’t be farther from the truth. The 2021 Retirement Confidence Survey showed a disparity between when workers think they’ll retire and when they actually do. While 65 is the expected retirement age, research shows that the actual average retirement age is three years sooner, at age 62. As many as 59 percent of workers expect to transition into retirement by gradually reducing their work hours. In reality, only 19 percent of workers achieve this. Health issues or organizational changes often make earlier retirement non- negotiable.1
Most people also overestimate how much time they’ll spend working during their retirement years. While 72 percent of workers say that they expect to work after retiring, only 30 percent of retirees report actually working for pay. If your retirement strategy depends on your ability to earn additional income during retirement, consider a backup plan in case things don’t go the way you’re expecting them to.1
Myth 2 - I'll withdraw 4% of my retirement funds each year.
You might have heard of the 4 percent rule, the concept that retirees should plan to withdraw 4 percent of the funds in their retirement account balance for each year of retirement. The truth is, figuring out how much money you can or should withdraw each year from your retirement account is a complicated calculation that’s often best left to a financial professional.2 Opinions vary, and your strategy should always take into account your unique situation. For example, some research suggests that 3.3 percent is a better goal than 4 percent. That means, assuming a $1 million account balance, you’d withdraw $33,000 instead of $40,000 during your first year of retirement. A $7000 annual difference could present you with significant budgeting decisions to make.2
The 3.3 percent rule is calculated in a conservative fashion; it assumes that 90 percent of retirees will have enough in their retirement account for a 30-year retirement. With the help of a financial pro, you might make some simple tweaks to the calculation that can help you estimate what’s possible for you a bit more accurately.2
Myth 3 - I need a million dollars to retire.
If you’ve been on social media lately, you might have seen posts that say you need a minimum of $1 million to retire. While a nice, round number always makes a good headline, one size doesn’t fit all. In fact, there are numerous factors to consider when estimating retirement needs. Inflation, for example, can have a large impact on your long-term strategy.
Let’s take a closer look at how two inflation rates can impact a million- dollar, all-cash portfolio. At a hy- pothetical 4% annual inflation rate, you would be able to withdraw an inflation-adjusted $40,000 a year for almost 18 years before running out of funds. On the other hand, assuming an annual inflation rate of 1 percent, the same all-cash portfolio would allow for an annual withdrawal of $40,000 a year for over 20 years. Anything you have saved in your retirement account is better than nothing, but the more you can put away now, the more you may have later on.
So, what do you think about these myths? Have you found yourself buying into them? As always, we’re here to help, and we love to discuss topics like these. If you ever have any questions or financial concepts you’d like to explore together, please feel free to reach out. If you would like to schedule a Retirement Readiness consultation with one of our experienced advisors, you can do so now by clicking on the link:
- ERBI.org, January 2021
- CNBC.com, November 11, 2021. The 4% rule is a hypothetical withdrawal strategy used for illustrative purposes only. It should not be considered a substitute for a more comprehensive retirement withdrawal evaluation
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