Retirement is not an easy decision, and the numerous myths floating about do not do much to help the cause. Unfortunately, many people fall prey to these misconceptions without ever realizing it, and inadvertently end up damaging their retirement security.
In this blog, Samir H Bhatt talks about some of the most prevalent – but dead wrong – information regarding retirement.
The Most Common Retirement Myths:
Myth 1 – There is No Need to Revisit the Withdrawal Rate:
A historical rule of thumb has been that an adequately diversified portfolio can last around three decades, as long as the annual withdrawal rate is below 4%.
However, this is an obsolete way of thinking about retirement savings, and there is no one-size-fits-all approach. The ideal retirement strategy and plan requires you to consider your current financial position, future income, and retirement goals. Besides, this plan and your withdrawal rate can both change in line with any changes in your circumstances.
Based on how far you are from retirement, Samir H Bhatt recommends using the following approaches:
For People Nearing Retirement:
Withdrawal rates should be regularly reviewed; this allows you to observe how inflation rates and current share prices might impact your portfolio returns. You should be able to adjust your retirement savings and income based on your personal circumstances as well as the prevalent market conditions.
For People Who Are Mid-Career or Young:
You should plan a 3% to 4% annual withdrawal rate for the long-term.
Myth 2 – It is too late to Start Saving for Retirement:
The best time to save for retirement was yesterday; the next-best time is today. Just because you were unable to save as soon as you started working, does not mean that you should throw in the towel and feel that you are doomed to work until the last day of your life.
You might have to rely on a paycheck for longer (or remain invested for longer) than people who started earlier, but, once again, that does not mean that you cannot try to catch up. People aged 50 and above, for example, can contribute an additional $1,000 monthly or $7,000 yearly to their IRAs. For an employer-sponsored 401(k), this limit goes up to $6,500 monthly and $20,500 yearly. If you leverage this opportunity and start investing an extra $1,000 per month to your IRA from the day you turn 50, you could have an extra $27,000 in your retirement fund by the time you are 65 years old.
On the flipside, you could also reduce your expenses to meet your retirement saving goals. Even simple measures like driving an older vehicle or taking public transport, and decreasing your entertainment budget, can go a long way in compensating for the late start.
Myth 3 – My Retirement Living Costs will be lower:
Speaking of living costs, a lot of people believe that retirement is associated with slowing down, modest living, and senior discount coupons. Samir H Bhatt thinks that this belief is particularly prevalent in younger people who think that old age is all about knitting sweaters and playing with your grandkids. However, with time, you will realize that 65 (or even 70) is no age to restrict oneself to the backyard.
People in good health often like to spend the initial few years of retirement in traveling and enjoying new adventures that they were unable to during their working lives. If you have the means, you might even want to take your grandkids to Disneyland, observe the Churchill polar bears, and cross off as many items on your bucket list as possible.
To sum up, every retirement experience is different, which means that general advice or rules of thumb are hardly ever applicable across the board. It is important to do your own research, create a personalized plan, separate fact from fiction, and stay away from myths like the ones that Samir H Bhatt just dispelled.