There is not a universal approach to saving for retirement. What works for one person may not work for another. Additionally, there is no shortage of advice on how to save for retirement. It can be tough to distinguish the good advice from bad advice. However, there are some well-known tips that are outdated. Here are three popular but outdated retirement tips you should ignore.
Withdrawing 4 Percent of Your Retirement Income
This tip claims you can withdraw 4 percent of your savings during your first year of retirement, and then you can increase your withdrawal to account for inflation every year thereafter. Your savings should last for 30 years if you follow this rule.
However, this rule first appeared in the 90s when the interest rate on bonds and treasuries were high. Today, rates are below 2 percent on 10-year treasury bills. Also, this advice assumes a 60/40 split on stocks and bonds in your investment portfolio. Since all investment portfolios are different, this advice does not apply to everyone. It is possible to run out of money if you follow this rule.
Pay All Your Debt Before Retiring
Paying off all your debt today could be hazardous to your financial health. For starters, you could spend your prime earning years trying to pay off all your debt and leave yourself with little to no money to save for retirement. If you can afford to pay some of your debt during retirement, you might be better off financially today.
This rule also relies on the premise that debt, in any form, is bad. The reality is all debt is not necessarily bad. It is not a requirement that you need to pay off your mortgage before you retire. If you can put the money you would spend to pay off your home loan to work today, you might earn more in returns than what you would earn from slowly building equity in your home.
Spend Less in Retirement Than You Do Today
A well-known retirement tip is to expect to spend around 75 percent of what you do today in retirement. However, many people will spend more during their retirement years than they do today.
The cost of certain things will increase by the time you retire, but some of those costs will disappear, such as the cost to commute to work. Try to create a realistic retirement budget using costs that are sure to go up by the time you retire, and make sure to include the expenses that will disappear.