RETIREMENT:
Consider: Only 16.9% of all American retirees get corporate pensions, so they must live on savings. Bond interest rates are low, so they probably can’t live on bond savings. Inflation of 3%/year will erode pensions by 24% in ten years. Life spans grow—an average 65-yaar-old woman can expect to live to nearly 87, and the equivalent man to 84. About 58% of all couples aged 65 will have one partner live to 90, and 28% will have one partner live to 95. These are merely averages.
If you invested $1 million in bonds in 1977, then withdrew 6% of the account eh first yea rand raised that amount each year by the % gain in the consumer price index, your account would empty by 1998. If you invested in shor-term Treasury Bills, you’d go broke in the same amount of time. An account invested in stocks would have grown to $12 million in 30 years, even with withdrawals.
This is not a guarantee—if you had retired in 1972, with same scenario, you’d have gone broke in 1985 because the market fell.
Therefore:
1. If you retire young and so your retirement might be long, you might want to leave more of your retirement funds in stocks—say 50% in stocks, 50% in bonds if you retire at 65. Not too much in volatile stocks—cut back on risk. But don’t put ALL in bonds.
2. Don’t take out all the money in January that you expect to spend that year—doing so loses the interest on those funds.
3. Keep a simple life. Costs down. Withdraw only maximum of 4% or 5% per year.
4. Don’t overtrust financial advisers supplied by employer at retirement parties. These advisers claim to be able to fund early retirement if the workers will invest in high-return, high-commission funds. Now regulators are fining brokerage houses who exaggerate returns. So don’t retire too early. Some people have simply assumed that their retirement funds would mature rapidly every year, have quit their jobs, have spent heavily in a retirement home, have seen a downturn in the market hit their retirement funds, have had to return to work at far lower salaries than they had before.
5. Remember health care costs can be higher as you get older, so save extra.
6. Thinking you can make as much from returns alone as you can from working means either a very large investment or an unrealistically high expectation of return. Average long-term return is 10.4% when all returns are reinvested, 6% for more conservative instruments, say bonds. Thinking you can withdraw 9%/year and never run out is unrealistic and will probably deplete your fund, says the Financial Industry Regulatory Authority.