It’s understandable that the prospect of retiring has become increasingly scary for a lot of people. Emily Brandon’s recent piece at U.S. News explores some of the fears uncovered by a recent Financial Engines survey of 300 retired and soon-to-be retired people. Unfortunately, this fear is causing some folks to simply throw up their hands in despair:
“Some individuals were paralyzed by the uncertainty and took no action in order to avoid making incorrect decisions. This inertia caused some retirees to choose conservative investments to avoid getting locked into something and not having access to their money.”
Whatever you do, don’t do nothing!
It’s true, there is a lot of advice out there on how much to save, how to invest it, and how to make it last—some of it conflicting and all of it overwhelming. But that doesn’t mean it’s better to take none of it. Standard rules of thumb have been getting a bad rap lately. True they are not precise, but at least they give us a place to start.
How much to save
Last week I wrote about the 4% rule. Is it perfect? Of course not, but it’s a great place to start. It will give you a target. All you have to do is adjust for your own circumstances.
From paralysis to action: Aim to save 25 times your annual retirement budget needs that will not already be met by Social Security if you are planning to retire near age 65.
How to invest it
Is the age-based rule of thumb for allocating your assets perfect? You know what I’m going to say: No, but it’s a good place to start. Should your allocation between bonds and stocks be 30/70, 60/40 or somewhere in between? It’s up to you. There really is no wrong answer here, well, aside from putting 100% of it in stocks or bonds, or your house, or the mattress. Start with the basics and adjust for your own risk-tolerance as explained in this article: Should You Invest According to Your Age?
From paralysis to action: Just pick an allocation, you can always change it. Invest it in a diversified selection of low-cost index stock and bond funds.
How to make it last
Rebalance your portfolio periodically. I don’t even think this rule is controversial. As the years go by, your target allocation is going to get out of whack. The market will impact your allocation and so will your own withdrawals. Rebalancing will force you to sell stocks when they are high and buy them when they are low. You’ll also want to rebalance simply to shift to a more conservative allocation as you age.
My approach to asset allocation is to always have about 10 years of living expenses in bonds and cash so that I won’t be forced to sell stock mutual funds during market tumbles.
Putting it all together
Let’s assume you are retiring at 65 and planning on a 4% withdrawal rate. You will need at least 40% allocated to bonds (40/60 allocation) to have 10 years of living expenses in your bond allocation. Assuming your portfolio returns about 2.5% over inflation, you will need to migrate toward a 50/50 allocation by your 75th birthday to maintain a 10 year supply of liquid assets. If you continue to periodically rebalance to keep that target of 10 years living expenses, your allocation would shift to about 70/30 by the time you are in your mid-80’s.
A recent survey showed that many people’s paralysis is causing them to make a different plan for retirement all together: never retire at all. My issues with that action plan are in my post at U.S. News this week, Denial is Not a Retirement Plan.
This is a post from Retirement: A Full-Time Job.