There are many old rules about planning for and living in your retirement years. However, those rules are often put out of date by health costs and working well into your later years, according to Forbes in “Here’s How to Refresh Your Retirement: The 4% Rule of Thumb.”
It is now thought that the 4% rule is a decent base line. However, you’ll need to go deeper into the details to plan for your retirement. Your spending also has a lot to do with what you expect from retirement and how expensive a lifestyle you choose.
One key factor today is tax-deferred investing. The importance of being taxed at the highest rate versus paying a lower tax rate can be misleading. Many people defer taxes on their investments, because they don’t want to pay 30% to 40% income taxes when they could defer to a higher bracket, if tax laws change.
Some are considering investment in single family rental properties. If you buy a rental house with a small capital investment, the house will ideally appreciate over time on a tax-deferred basis. Owners benefit by depreciating expenses on their tax returns. The single-family rental home can be paid off in 15 years to 20 years and create income for the owner—predictable income that could also increase from year to year.
Another strategy is to create an investment portfolio that combines diversified stocks and high-quality fixed annuities, paired with a systematic withdrawal plan and a built-in buffer strategy to reduce risk in the case of severe stock market swings.
One advisor noted that if a retiree today relies on a traditional 60/40 stock/bond portfolio, they could be looking at a financial disaster. The yields on bonds are at historic lows and a 4% withdrawal is just asking for trouble.
An effective tax reduction strategy has the potential to raise a retiree’s safe withdrawal rate even higher.
The best advice is to have a plan in place that works for the lifestyle that you and your spouse want and being prepared to adjust, if necessary. Your plan may include working, until you both reach full retirement age, working part time during retirement, moving to a location that is more affordable or aging in place.
An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances and will most likely include a solid retirement plan.
Reference: Forbes (Aug. 7, 2018) “Here’s How to Refresh Your Retirement: The 4% Rule of Thumb”