It takes you years to plan for your retirement and over time you will hear different kinds of
retirement planning advice. Knowledge is power and the more of it you have, the better your retirement savings plan will be. Sure, not every assumption is going to be harmful, but there are many that you need to avoid. Here's a look at five big ones.
1. Social Security Is All You Need
Rewind a few decades and a retiring couple could live off of Social Security, but those days are long gone. After all, the maximum an individual at full retirement age can get is $2,639 for 2016. If you retired at age 70 this year, your benefit would jump to $3,576, but that still might not be enough to live on if you were accustomed to a particular lifestyle during your working years.
Social Security isn't going away altogether, but assuming it is going to be enough to cover all of your living expenses will leave you with a big savings shortfall that may result in some extreme downsizing actions.
2. You Only Need 30 Years of Savings
The prevailing wisdom for years has been that if you save enough money to live 30 years in retirement, you are golden. But that assumption came at a time when people weren't living into their 90s and even reaching 100 or higher. With the life expectancy getting longer, that 30-year rule is now on the conservative side of what you'll need. "The biggest mistake when doing retirement planning is assuming you will only live for a certain number of years.
3. The 4% Rule Will Prevent You from Outliving Your Money
Hand-in-hand with saving enough for 30 years is the 4% rule, which says if you draw down 4% of your money each year in retirement, adjusting for inflation, you won't outlive your nest egg. But that rule is based on a lot of assumptions - one being that you're getting a decent rate of return on your investments. However, in a low-interest rate environment that may not be the case, which is why the 4% rule probably doesn't apply in the current market environment.
The problem with this rule of thumb is that it doesn't account for the average life expectancy rising and the cost of medical expenses rising more than the cost of inflation.
4. Your House Is Enough of a Retirement Nest Egg
It's no secret. Lots of people haven't saved enough for retirement, with many having no savings to speak of at all. That may sound like a scary notion, but these same individuals have one asset they plan to tap in retirement: their home. Entering into retirement with a paid-off home is an enviable position to be in, but thinking it is a good source of income or, worse, having it be the only source of income in retirement can also be risky. The real estate market has ups and downs, and if you find yourself in a down market the only way you may be able to get money out of your home is a reverse mortgage.
5. Owning Stocks Is No Longer Necessary
Lots of people nearing retirement have been trained to go into conservative mode the closer they get to their retirement date. That means taking their money out of stocks and putting it all in bonds and CDs. Investors who were burned by the stock market decline in 2008 and 2009 are even pulling out of the markets altogether.
But that is the worst thing a retiree can do. Since retirement will last years, the money you have amassed has to grow at least at the rate of inflation and with luck, more. Without stock exposure, particularly in a low interest rate environment, it is going to be hard for investors to see their money keep pace with inflation. That, in turn, will devalue their money, giving them less purchasing power. Stocks have been great for keeping up with inflation and therefore protecting an investor's real standard of living in retirement, as well as affording a decent spending rate in retirement.
The Bottom Line
Funding retirement is going to be one of the biggest expenses you face, which is why a lot of planning is required. Without a sound financial plan, investors risk not having enough money to live on. But a savings plan based on wrong assumptions can be more harmful than not having one at all. That is why investors have to let go of some old ideas that have guided retirement planning for decades. It is never too early to start saving and planning for retirement.