Most likely whatever retirement planning you have done is wrong. Change your assumptions, ask questions and plan for the worst. There is no one more concerned about YOUR money than you and if you don’t take an active interest in your money – why should anyone else?
So says Lance Roberts (StreetTalkLive.com) in edited excerpts from his original article* entitled So You Think Your Retirement Plan Is Right?
Further edited excerpts from the original article are as follows:
Below are some very basic concepts that you need to consider when planning for your retirement whether it is in 5 years or 25 years.
1. The Market Does Not Return X% Per Year
The single biggest mistake made in financial planning is NOT to include variable rates of return in your planning process. Furthermore, choosing rates of return for planning purposes that are outside historical norms is a critical mistake.
Stocks tend to grow roughly at the rate of GDP plus dividends. Into today’s world GDP is expected grow at roughly 2% in the future with dividends around 2% currently. The difference between 8% returns and 4% is quite substantial. Also, to achieve 8% in a 4% return environment, you must increase your return over the market by 100%. The level of “risk” that must be taken on to outperform the markets by such a degree is enormous.
While markets can have years of significant out-performance, it only takes one devastating year of losses to wipe out years of accumulation. Plan for realistic returns in the future as well as adjust and account for market swings that will impact the ending value of your money.
2. Most Likely You Aren’t Saving Enough
The average salary in America is about $53,000 a year as per the US Census Bureau. A critical mistake that many individuals make is assuming that salaries will grow at some specific annual rate until you retire but this is not necessarily a realistic assumption.
In addition, the average American has ONLY about ONE year of salary saved up for retirement. The point to be made is that very few individuals have saved adequately enough to actual retire and live off the income their portfolio will generate.
For those that “THINK” they have adequate savings, they most likely need to rethink their plan. Given the highly indebted levels of the global economy today, it is impossible for interest rates to rise significantly in the future due to the impact of debt servicing requirements. This means that the old “4% rule of thumb” as a withdrawal rate likely needs to be tucked away in the history books. This also means that most individuals are not just under-saved for retirement, but grossly so.
3. Retirement Is More Costly Than You Think
In a recent survey of 5000 retirees, the average difference between pre- and post-retirement incomes was about 12% NOT the usual idea bandied about that one can retire on 70% of one’s current income. The reason is that, while your house may be paid off and your children gone at retirement,
- individuals tend to substitute other items that eat into the retirement budget such as picking up an expensive hobby like golf, traveling more, or spoiling grandchildren, and
- surging medical expenses and higher healthcare insurance costs will take a big bite out of retirement savings.
To be safe, you should be planning on 100% of your current income stream for retirement. If you aren’t – you could find yourself coming up short, and you don’t want to find that out once you are already IN retirement.
Rules Of The Road
You cannot INVEST your way to your retirement goal. As the last decade should have taught you by now, the stock market is not a “get wealthy for retirement” scheme. You cannot continue to under save for your retirement hoping the stock market will make up the difference.
Investing for retirement, no matter what age you are, should be done conservatively and cautiously with the goal of outpacing inflation over time. This doesn’t mean that you should never invest in the stock market, it just means that your portfolio should be constructed to deliver a rate of return sufficient to meet your long-term goals with as little risk as possible.
- The only way to ensure you will be adequately prepared for retirement is to “save more and spend less.” It ain’t sexy, but it will absolutely work.
- You Will Be WRONG. The markets cycle, just like the economy, and what goes up will eventually come down. More importantly, the further the markets rise, the bigger the correction will be. RISK does NOT equal return. RISK = How much you will lose when you are wrong, and you will be wrong more often than you think.
- Don’t worry about paying off your house. A paid off house is great, but if you are going into retirement house rich and cash poor you will be in trouble. You don’t pay off your house UNTIL your retirement savings are fully in place and secure.
- In regards to retirement savings – have a large CASH cushion going into retirement. You do not want to be forced to draw OUT of a pool of investments during years where the market is declining. This compounds the losses in the portfolio and destroys principal which cannot be replaced.
- Plan for the worst. You should want a happy and secure retirement – so plan for the worst. If you are banking solely on Social Security and a pension plans, what would happen if the pension was cut? Corporate bankruptcies happen all the time and to companies that most never expected. By planning for the worst, anything other outcome means you are in great shape.
Most likely whatever retirement planning you have done, is wrong. Change your assumptions, ask questions and plan for the worst. There is no one more concerned about YOUR money than you and if you don’t take an active interest in your money – why should anyone else?
*http://streettalklive.com/daily-x-change/2738-your-retirement-plan-is-probably-wrong.html
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I’d add that anyone with the ability of amass “enough” for retirement also consider funding a Long Term Policy with lifetime benefits (as early as possible in order to keep cost low) to insure that neither they nor their family has to spend down family resources should a Long Term Care event strike, which would then threaten everything you have worked so hard to attain.
A good rule of thumb is that for an individual, the chances of needing Long Term Care are 50:50 since you will either need it or you will not, so it is far better plan ahead than pay a huge bill every month “forever”, beside for most people the cost of the Long Term Care policy is deductible, ask your tax person or advisor about your specific situation.
Good Luck