As we went dutifully through our work lives, and if we thought about retirement at all, we became aware of some rules of thumb meant to give us guidance for financial planning. For years, we were pretty much bombarded with adages such as,
Perhaps because we baby boomers are such a large and diverse group (we number over 70 million), and also a bit ornery, these rules of thumb just don’t apply to us, or certainly not as broadly as they once did. It’s possible that you are the one-in-a-million person who can just follow these rules and you’ll be all set, but it’s much more likely that not all of them will apply to you or apply in a modified way.
The 80-percent rule, for example, depends on lots of factors such as whether you have a mortgage, the cost of living in the part of the country that you reside in, whether you are supporting other family members (such as grandchildren – an increasingly common circumstance), how many cars you own, whether you like to travel, how budget-conscious you choose to be, and many other things. It also depends on having a fairly steady pre-retirement income/expense history from which to derive the post-retirement number.
We volunteered to teach in Africa for a year right after we retired, so our expenses went way, way down, but then when we returned we decided to let loose a bit and for the first couple of years after we were back we went way over to the other extreme. The other item that complicated our calculations of how much we needed to retire was that both my husband and I had been self-employed for many years before we retired and our incomes/expenses were very different each year! We really didn’t have a base number from which to calculate the 80 percent. We finally found a happy medium (more about that in a minute) but that number has nothing to do with how much we were earning/spending before we retired.
The four-percent rule is just as bad. First of all, the “nest eggs” of baby boomers from which to draw are made up of very diverse portfolios. They include stocks, bonds, precious metals, savings accounts, mutual funds, money under the mattress, and so on; each of these is generating a different return. Suppose, for example, you had everything you’ve put away over the years in stocks and let’s further suppose it totaled $300,000 at the beginning of 2017. Following the rule, you took out four percent in January, which is $12,000 (or $1,000 a month for the year). If you were in this fortunate position, of course, you made a nice bundle during 2017 – the Dow went up 25 percent!! – calling into question why you should limit yourself to withdrawing only four percent in January 2018. Now let’s say you had that $300,000 invested in your brother-in-law’s struggling bookstore. A small return, if any, on that one, so why does taking out four percent make sense in this scenario?
Perhaps more important, the four-percent calculations never include the equity in your house. One of the most attractive income-generating options these days is a reverse mortgage (no, I promise you, it’s not a scam – I’ll have a blog post on this topic in the next month or so) which can make a very big difference in your financial picture.
I could go on, but I think you get the idea. The real question is, What to do now? How can you make financial plans before you retire or check the plans you are living with now post-retirement? The answer is to employ an independent and certified financial advisor. This doesn’t have to be expensive! And the peace of mind it can bring will be well worth it. It’s what we did and this one step was instrumental in our being able to retire at 61.
Here is a whole blog post about financial planners and, before long, I will include some good pointers in our Resource Library as well. Meanwhile, I close today’s post with this thought: the financial aspects of retirement can be daunting, but that doesn’t mean you can or should ignore them. According to CNN, “The mean retirement savings of all families in the U.S is $95,776. But that number doesn't tell the whole story. Since so many families have zero savings and since super-savers can pull up the average, the median savings, or those at the 50th percentile, may be a better gauge. The median for all families in the U.S. is just $5,000, and the median for families with some savings is $60,000.”
I would love to hear your comments!
I'm Linda Fleit. My husband and I were lucky enough to retire when we were 61, about nine years ago. We love being retired and want to share all that we've learned over the years about this wonderful stage of life.