3 Dated Rules of Thumb Retirees Should Think Twice About – Kiplinger’s Personal Finance

Wouldn’t it be great if following just a few “one-size-fits-all” financial formulas really could make planning a successful retirement less problematic?

Unfortunately, there’s no such thing.

Oh, sure, there are theories and guidelines and strategies. And some can be helpful as a starting point for financial planning. But there also are some widely used rules of thumb that can end up pointing retirees in the wrong direction, leading them toward a bumpy future.

And this is not just because we’re all different, with different challenges, goals and paychecks. (Although that’s a big part of it.) But there also is this: The world around us keeps changing, and those long-accepted approaches to investing and income planning often require updating.

Here are three investing and retirement “rules” or strategies you’ve probably heard of, along with the reasons they might not work for you.

The 60/40 Rule

Regardless of their goals, risk tolerance or other relevant factors, investors frequently are told that a generic “60/40” portfolio mix (with about 60% invested in stock and 40% in bonds) is the best way to go while they’re still working and saving for retirement. And I get it: It’s safer than overcommitting to equities. But that conservative 60/40 mix also could potentially shortchange portfolio growth in years when owning more stock might make sense. 

Then, when those investors retire, financial professionals often suggest moving even more of their money to bonds — because “when you’re older, you should be more cautious.”

Though these bond-heavy allocations might have worked out just fine in the past — when interest rates were much higher, and inflation was much lower — today, it can be a recipe for trouble.

Remember: Bonds are loans. If you invest in bonds when interest rates are low (and they really don’t get any lower than they were last year), you’re basically handing over your hard-earned money for little in return. Indeed, with the current rate of inflation, you could end up being paid back with dollars that are worth less than what you invested in the first place.

The amount of risk in your portfolio should be based on factors besides your age, including your retirement income requirements, your desire for growth or a combination of both. Your portfolio mix should be carefully chosen — and adjusted over time — to suit your individual needs.

The 4% Rule

Another troublesome old-school formula is the “4% rule,” which suggests you can safely withdraw 4% from your portfolio when you retire and, from that point on, continue to withdraw 4% annually while adjusting for inflation.

This rule of thumb has been around for decades, …….

Source: https://www.kiplinger.com/investing/605068/3-dated-rules-of-thumb-retirees-should-think-twice-about

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