Everywhere we turn, we get our fair share of terrible advice. From your single, childless co-worker’s parenting advice to your broke next-door neighbor’s investment suggestions, it’s impossible to escape terrible advice from all angles. But when it comes to your financial well-being, it may be more of a challenge to decipher great advice from financial faux pas.
To help you navigate the nonsense, we have collected some of the worst financial advice we’ve heard over the years and provided our advice on what to do instead.
The 4% rule
Over 40 years ago, financial advisor William Bengen created what’s known as the “4% rule”. This rule states that you should withdraw 4% of your total portfolio within your first year of retirement and then adjust each consecutive year for inflation. But this rule doesn’t allow for a lot of flexibility and insinuates that it works for every investor in every scenario. Yet this is far from the truth.
First, adjusting for inflation every year may not be necessary. This is because all retirees expenses may not increase over time. In fact, according to the Bureau of Labor Statistics, retirees expenses may decrease over time. In our practice, we have seen very few retirees increase their withdrawal amount every year.
Also, this strategy doesn’t account for the impact of market volatility. When the market dips or we are faced with a recession, it may be wise to cut the standard distribution amount. Investors may want to cut back on their spending habits until the market begins to grow again.
What to do Instead of the 4% Rule
Instead, try partnering with a financial planner with retirement expertise. Retirement planners are experts in the finance industry and they help people understand and optimize all the pieces of their unique financial puzzles to help achieve the retirement they’ve always dreamed of.
Not only are retirement planners amazing financial resources, but as you work through the process of creating your written plan, they can also help you develop the optimal withdrawal strategy for your lifestyle. They can help you see your entire financial picture and suggest options and strategies that will assist you in achieving your ultimate goals. So, before you implement the 4% rule, meet with a financial planner.
The 60/40 split for risk
Many financial professionals have recommended the 60/40 portfolios. This means that 60% of an investor’s portfolio would be compiled of equities and 40% of the portfolio would be compiled of bonds or fixed-interest securities. While this may have been a good strategy during the ’80s and ’90s, the recent bear markets and extreme dips in performance have made this strategy less appealing.
What to do instead of a 60/40 split portfolio
Now, financial professionals are recommending a more diversified portfolio mix. This is typically one that is not just composed of stocks and bonds. It’s wise to take a much broader asset allocation approach to achieve long-term growth. Your financial planner can help you create a diversified portfolio to help you match your objectives with your asset allocations.
Additionally, your financial planner will help you select investments that coincide with your risk tolerance. You don’t want to have a portfolio that causes a panic attack every time there’s a downturn in market returns.
Wait until age 70 to take Social Security
Did you know if you delay your Social Security benefits until age 70 you’ll receive a benefit boost? Your monthly payment will increase by 32% if you wait until age 70 instead of starting to take benefits at age 66. If you live until you’re 80, the increase to your benefit amount will be made up over 4 years that you didn’t receive a Social Security check.
However, with the uncertainty of future benefits, you may want to claim your benefits sooner. According to the Social Security Administration, full benefits will be payable until 2037. After this point, beneficiaries will receive 76% of their full benefit amount. To ensure payments are made in full in the future, Congress will need to act and discover a different revenue stream.
In addition to the uncertainty of future benefits, your health or other circumstances may not allow you to wait until you turn 70 years old. For example, if you can no longer work due to your health condition, you may need to begin claiming your benefits earlier.
What you should do instead of waiting until you’re 70 years old
While this piece of financial advice may be beneficial to some, it may be the worst piece of financial advice for others. When combing your financial obligations with the uncertainty of the future, it’s best to determine when to apply for your benefits based on your unique circumstances.
When you decide to take your benefits shouldn’t solely rely on the increase in your benefit amount. Factors such as your health, whether you’re still working, if you’re single or married, and your financial well-being should determine when you should apply for benefits.
Keep in mind, everyone has a different financial situation that may require a different recommendation. Evaluating all the pieces of your financial puzzle can help you come up with a more suitable option for your specific situation. There is no right answer when it comes to claiming your benefits. That’s why it’s important to work with a financial planner who can help you evaluate all the deciding factors and give you an appropriate recommendation for your situation.
Always take your Social Security at 62, no matter what
Conversely, many financial experts recommend taking Social Security as soon as possible. While beginning to take Social Security at an early age seems tempting, it may not be the best option for your financial situation. If you decide to take your benefits starting at age 62 rather than full retirement age, you can expect up to a 30% reduction of your benefit amount.
Also, if you decide to retire, you’ll have 3 years until you’re eligible for Medicare. This means that you’ll have to find private health insurance for the time being. With the rising cost of health care, not having Medicare available to you for assistance with medical expenses can eat up a large portion of your savings.
Additionally, you’re missing out on the financial benefits of working and saving longer. You’ll need to consider the investing power you’ll give up if you stop working full-time. Even though not everyone can continue working past age 62, it’s something to consider if you’re healthy and are offered the opportunity to remain in the workforce.
What to do instead of taking Social Security at age 62
What should you do instead of taking Social Security right away? Speak with your financial planner. A financial planner will encourage and direct the tough conversations to help you govern the best time to claim your benefits. By reviewing financial documents, investment accounts, retirement savings, insurance policies, and any other accounts that may involve your financial future, they can determine the most appropriate time to claim your benefits.
Only live off the interest of your investments, don’t touch the principal
Some financial experts recommend a distribution strategy that only taps into the interest of your investments. However, a true interest-only strategy may only serve those with excess capital. For example, let’s say you have saved $1 million for retirement and only need $54,000 for your retirement lifestyle. If we assume your nest egg will yield at least 6% a year, you technically would only need about $900,000 to live off. This would leave you with $100,000 for emergencies.
While this example may sound great, things may not always work out as planned. While you could aim for an interest-only strategy, you may need to tap into your principal from time to time for extra expenses. You may also need to adjust when there is a market downturn or recession. If you’re not earning interest on your portfolio for a few years, you may have to tap into the principal.
The other thing you should ask yourself is why you want to keep your principal amount. Do you want to save it for your children? Or perhaps do you want to donate the proceeds to a charitable cause? It’s important to ask yourself these questions to determine if it makes sense to leave the entire principal amount.
What to do instead of only living off the interest of your portfolio
As we’ve stated, everyone has different financial situations which require different financial advice. Your financial planner can help you develop a withdrawal strategy that will help you reach your financial goals and maintain your desired lifestyle in retirement.
During the process, you may discover an interest-only portfolio is just what you need, or you may decide to go in a different direction. Whatever you choose, make sure your withdrawal strategy is well thought-out and makes sense for your goals and objectives.
You need $2 million to retire comfortably
It’s a common assumption you need at least $2 million or more for retirement. This bad piece of financial advice causes anxiety and frustration among pre-retirees around the nation. This number is said to account for inflation, market risk, market volatility, life expectancy, and your spending habits in retirement.
In theory, $2 million may be a good target; however, it’s not very realistic for many Americans. With the 2017 median household income coming in at around $60,000, many Americans would have to invest at least $1,300 a month for 35 years to accumulate $2 million (assuming a 6% return).
What to do instead of using the $2 million rule
No one knows for sure how much money you’ll need for retirement. Many factors will determine the amount of funds you’ll need to support your lifestyle during your golden years, including what lifestyle adjustments you’ll make and what unexpected expenses you may encounter.
Instead of striving for the $2 million mark, take control of your retirement saving. Spending your days worrying about the future takes away from all the wonderful things you currently have in your life. We can work with you to know how much money you can spend every month of every year during your retirement.
The bottom line
Instead of listening to the media and taking poor financial advice from your neighbors, speak with a financial planner who can better guide you. A financial planner can provide the tools and resources you need to achieve your financial goals.
If you’re looking for a financial planning partner who can help you realize your retirement goals, we have financial planning offices in Redmond, Seattle, Mill Creek, the Tri-cities region, and Denver. Our firm focuses on helping retirees and those preparing for retirement achieve financial freedom by creating a plan that shows them how they can have the income they need and want until they turn 100.
If you’re ready to take the first step to achieving your retirement goals, our team is ready to assist you. We’ve helped hundreds of couples and individuals smoothly transition into retirement with confidence, and we’d like to do the same for you.