TRANSCRIPT:
Following rules of thumb can lead you astray rather than help you. Here are five retirement rules of thumb you should not stick to. Hi, I’m Hunter Brockway, founder of Boca Retirement Strategies, here to guide you to a successful stress-free retirement while spending more and avoiding being killed in taxes. The first rule of thumb is saving 10x your income to retire on. What this rule of thumb does not consider, first of all, is your actual spending. Having a rule of thumb for a particular portfolio of value rather than what you will be doing and spending your money on in retirement does not match up. This rule of thumb also does not take into account the tax status of your money. If one person is saving their entire life into a traditional tax-deferred account and another person is saving into a Roth-style after-tax account, person B could have anywhere from 15% to 50% more money. What this rule of thumb also does not consider or account for is other sources of income. What about Social Security, pensions, part-time work, or any other income?

This rule of thumb could easily cause you to either over-save or under-save, neither of which is ideal. The next rule of thumb is similar. It suggests that you should save x% of your income for retirement. But at what point or what age are you in your savings? When will you retire? What are your goals in retirement? Again, what is the tax status of the money that you’re saving? And once again, with this rule of thumb, what other sources of income might you have in retirement? The 4% rule is a rule of thumb for retirement portfolio distributions that was created based on the worst times in history and worst returns in history. It is a rule of thumb that mathematically is correct, but it doesn’t mean that this rule of thumb gives you your best retirement.

The 4% rule does not allow us to maximize our income. If you utilize strategies like Buckets and Guardrails approach to income, you could generate more portfolio income. The 4% rule does not allow for raises in retirement due to inflation or portfolio performance. The 4% rule does not give us flexibility if we want to or need to make one-time large purchases. Having a strategy that allows for more income in retirement and allows for flexibility rather than locking yourself into a number, potentially only to retire with money stuffed in the mattress, is personally more my ideal scenario. Next on the list is using the rule of thumb that is a portfolio returns an average of 10%, which could be detrimental. Again, this is one that’s mostly true, the S&P does return on average around 10%. However, where this can lead you astray in retirement planning is when you retire, you most likely will not be 100% in stocks.

Therefore, your portfolio’s overall return will not max the 10% return of the S&P 500. You must consider that in retirement, you will have to get a little bit narrower when considering sequence of returns. Yes, we want to look at the overall picture and remind ourselves of that. On average, the stock market returns X amount and that’s why we should stay invested and protect our purchasing power. However, with sequence of returns, when you have to live off of your portfolio in the years that are less than 10% or negative, this dramatically affects your portfolio. The last rule of thumb to watch out for is the rule of thumb that incorporates your age into your investment allocations. You might have heard of this as the 60-40 rule, which says when you’re 60 years old, you should have 60% bonds and 40% stocks. And when you’re 70, you should have 70% bonds and 30% stocks. Well, this rule of thumb has been shown to lead to underperformance in maintaining purchasing power. We have to remember that across the 30-year retirement, you are likely to see living costs go up by about two and a half times. So in retirement, we have to disconnect from just seeing dollar signs and instead associate our portfolio with purchasing power. With that, go back and make sure that your financial plan is not based on rules of thumb, but is based on your specific situation. If you have any financial questions, you can send them to us at contact at bocaretirement.com or reach out through our website at bocaretirement.com.

I’m Hunter Brockway. Enjoy your successful retirement and thank you for watching. Bye.