The Five Biggest Myths of Retirement Planning

In the world of retirement planning, some myths persist, despite continued efforts to debunk them. Below, my colleague Tara Thompson-Popernik discusses a few of the most stubborn myths we encounter.

1. You can safely withdraw 4% of your portfolio a year in retirement

The “4% rule” may have worked in the past, but extremely low bond yields, below-average expected returns for stocks and increased longevity make a lower spending rate prudent for many retirees.

For a newly retired couple aged 65, with a retirement nest egg invested in a balanced portfolio (60% stocks and 40% bonds), we would generally recommend annual spending equal to about 3% of their portfolio at first, but increase that amount with inflation. A couple aged 75 could generally afford to spend closer to 4% of a balanced portfolio each year, because their life expectancy would be shorter. All else equal, their portfolio would have to support their spending for approximately 10 fewer years.

2. You’ll spend less in retirement

In early retirement, retirees often spend more than they did while working because they have more time to pursue a hobby or travel, although they expect this initial spending increase to subside as they age. But many retirees we encounter maintain an active lifestyle longer than they anticipated; that extra spending puts a strain on their retirement savings.

In addition, two great unknowns loom large for many retirees: how much they’ll have to spend long term on healthcare and how long their life span may stretch. We tend to caution our clients to anticipate spending at least the same amount, adjusted for inflation, as they move from their 60s into their 70s and 80s.

3. Always shift to bonds as you age

Bond yields at or near historic lows and increasing longevity (many retirees live for three decades after they collect their last paycheck) make a complete shift to bonds unwise for most retirees. Most investors will need the growth that stocks can provide to keep pace with inflation and to support their lifestyle in retirement. The precise amount will vary for each individual, depending on his or her circumstances, objectives and risk tolerance.

4. Take Social Security early

In the US, Social Security benefits can be drawn as early as age 62, and the majority of recipients begin taking payments at that point. But the Social Security Administration has created an incentive for workers to wait to begin drawing benefits until age 70, when benefits peak. For recipients born between 1943 and 1954, the benefit at age 62 is some 25% below the payout at their “Full Retirement Age” of 66. Conversely, between ages 66 and 70, recipients earn delayed retirement credits of 8% per year.

For retirees who expect their portfolios (and perhaps pensions) to meet their spending needs for life, the age at which they begin to take Social Security benefits doesn’t matter much. But for healthy retirees whose spending is higher than their portfolio is likely to sustain, it is often advantageous to wait until age 70 to start collecting benefits. The accumulated delayed retirement credits plus the inflation adjustment to the retiree’s higher benefit amount can make a big difference in the retiree’s ability to spend in old age.

5. Deferring taxes is always a good idea

The conventional wisdom is to defer taxes whenever you can. But federal income and capital gains tax rates are scheduled to rise at year-end unless Congress acts. For retirees (and other investors) facing a potential rate hike, it may make sense to pay lower taxes this year than to pay higher taxes in the future.

For example, now may be a great time for those who hold appreciated positions in the stock of a former employer to realize the gain and diversify that concentrated stock position. The same is true for those who still hold stock options in their former company’s stock.

Also, retirees who don’t expect to spend down their IRA accounts during their lifetime may want to convert all or a portion of their IRA accounts to a Roth IRA. As part of the conversion, the retiree will pay taxes now on the converted amount, but the account owner or, potentially, the owner’s surviving spouse or heirs, can withdraw assets from the Roth tax free later.

The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.

Tara Thompson Popernik, CFA, CFP®

Director of Research—Wealth Planning and Analysis Group
Tara Thompson Popernik was named the Director of Research for the Wealth Planning and Analysis Group in 2011 and is responsible for leading research initiatives on investment planning and asset allocation issues facing high-net-worth families, family offices, and endowments and foundations. Previously, she was a wealth management specialist, and before that she was a senior investment planning analyst. Prior to joining the firm in 2003, Popernik was a paralegal in the Capital Markets Group of Cadwalader, Wickersham & Taft. She earned a BA with honors in comparative literature from Dartmouth College. Popernik is a Chartered Financial Analyst charterholder and a CERTIFIED FINANCIAL PLANNER™ professional.

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