5 Retirement Rules That Worked for Decades — and Why They're Breaking Down Now
Retirement planning advice that served previous generations well is increasingly out of step with today's economic reality. The 4% withdrawal rule is antiquated. Using the equity in your home for retirement is not feasible. Investments are not stable paychecks for retirees.
Spiking inflation and a rocky stock market mean the old guidelines for retirement are not as reliable.
Here are five retirement rules that need a serious update.
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The 4% Rule
"This rule was popularized in the 1990s after research suggested retirees could withdraw 4% of their portfolio annually (adjusted for inflation) and likely not run out of money over 30 years," said Mark Henry, founder and CEO of Alloy Wealth Management. "Unfortunately, the rule operates under the assumption of predictable market cycles, moderate inflation and a 30-year retirement at most. That's not today's retirement reality."
"Today's retirees are facing higher and more volatile inflation, longer lifespans — with many retiring at 62 and living well into their 90s — sequence-of-returns risk and tax uncertainty," Henry said. "The 4% rule was a probability study, not a retirement income plan.
"Modern retirees don't need probability; they need a paycheck. The key question you need to ask yourself isn't, 'What percentage can I pull?' It's, 'How much can I count on?'"
Your House Is Your Retirement Plan
"For years, people believed the saying, 'Don't worry, your home will take care of you,'" Henry said. "In the 1980s, 1990s and even the early 2000s, that may have worked. But today, property taxes are rising, insurance premiums are surging and maintenance costs are exploding.
"A home is a place to live; it is not income. Unless someone plans strategically, most retirees are equity-rich and cash-poor."
The Market Always Bounces Back — Just Wait
"This way of thinking worked well when you were 45, still had a paycheck coming in and making regular contributions to your 401(k)," Henry said. "But retirement flips the equation upside down. Suddenly, you are starting to withdraw money. When you withdraw money during a market downturn, you are permanently locking in losses. This is called sequence-of-returns risk and it is one of the biggest threats modern retirees face."
You Can Quit Investing Once You Retire
"Your advisor can help you look into income-producing assets, such as rental properties, dividend stocks or other more conservative investments like money market accounts and time deposit accounts," said Kim Gattis, senior vice president and manager of financial planning at UMB Bank. "Having a passive way to generate income can help supplement any retirement savings you've built up."
Counting on Social Security To Fund Retirement
"Previous generations counted on Social Security income to fund their retirement, which we now know is not enough," said Cynthia Campos Delgado, founder and financial advisor at Campos Wealth Management. "Many jobs no longer provide 401(k) or pension plan options.
"Knowing that people are living longer, you have to take into account how you are going to sustain yourself for sometimes 30+ years after retirement. Start young and take advantage of the working years ahead to be contributing every year and increasing each year."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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