Someone who is reaching retirement age today but who didn’t start saving until the age of 40 is probably following advice from the mid-1990s — around the time that floppy disks were being phased out. Those who saved for retirement their entire working lives started with strategies from the mid-1970s when the first floppy disks were being introduced.
In terms of both PCs and portfolios, a lot has changed since then — and retirement advice rarely ages well. GOBankingRates asked the experts to weed out the old-fashioned tips that have not stood the test of time.
Allocate Stocks and Bonds in a 60/40 Split
For generations, the magic percentages for retirement-proofing a portfolio were 60% — that’s what went to stocks to keep your money growing — and 40%, which you converted to bonds to play it safe. And that split made sense back when bonds were actually worth your while.
“While bonds had solid yields in the ’80s, the ROI on a bond has dwindled since the Great Recession and historically low interest rates,” said Brian Hungarter, vice president and wealth advisor at Girard. “While they still have a place in the portfolio, investors can’t rely on the return they were once accustomed to.”
Rafael Rubio, president of Stable Retirement Planners in Southfield, Michigan, agrees.
“The 60/40 mix did well in the past, but with the recent runs of bear markets and the erosion of interest rates in fixed income, it’s time to look at alternative investments to help you reach your retirement goals.”
So, if that’s not the formula, what is?
“Many financial advisors are recommending diversification through different asset classes such as commodities, hedge funds or insurance products such as indexed annuities,” Rubio said.
Avoid Debt at All Costs in Retirement and Rent To Avoid a Mortgage
According to the National Council on Aging, “older adults increasingly are retiring with debt and are carrying greater amounts of debt than ever before.” At the time of the report, the organization also stated, however, that the two biggest threats are credit cards and medical expenses.
But that kind of toxic debt doesn’t represent all senior borrowing.
“Not all debt is ‘bad debt,'” Hungarter said. “With interest rates at record lows, taking out a loan or having a mortgage can be a good thing. This kind of ‘good debt’ allows for more liquidity that can be used to make your money work for you. It’s OK to retire with a mortgage if it fits within your financial plan.”
Concentrate Only on Dividend Stocks
Retirees have flocked to dividend stocks for generations — and for good reason. Not only do dividend stocks provide income without requiring retirees to sell shares, but the companies that issue them tend to be older, more established and safer bets.
That, however, does not mean that there’s no room for anything else — it’s a big stock market out there.
“Some good investments don’t pay a dividend,” Hungarter said. “That’s OK. Don’t be afraid to invest in stocks that don’t pay a high dividend. Dividends aren’t the only sign of an investment offering a return, and many companies in growth mode may not offer one.”
Simplify Retirement Investing With Target-Date Funds
Target-date funds are portfolios that adjust to become more conservative over time as retirement grows nearer. They’re always tempting, but they’re not always a good idea.
“Target-date funds can be easy and simple for the end-user, but can also be a detriment to the owner’s retirement,” Rubio said. “A target-date fund operates under an asset allocation formula that assumes you will retire in a certain year and adjusts its asset allocation model as it gets closer to that year.”
That kind of set-it-and-forget-it simplicity has wooed generations of investors — but the ease of autopilot is rarely the best bet if the tradeoff is a failure to adapt to changing market conditions.
“They adjust as you get closer to your retirement date,” Rubio said. “Generally, as you get closer to retirement, the more conservative your portfolio becomes, which … might not be the best strategy for your retirement.”
Also, as Rubio pointed out, target-date funds are often actively managed at a premium cost.
Follow the 4% Rule
For decades, savers have been told that they’re ready to retire when they can live off of 4% of their retirement savings annually.
“This retirement guideline, which was developed in the ’90s, says you should be able to safely withdraw 4% of your portfolio per year — plus cost-of-living increases to account for inflation — during retirement to make your money last,” said Olivia Tan, a Florida-based personal finance coach and the co-founder at CocoFax. “The problem? Interest rates were higher back then and the economy was much different. While the 4% rule was founded on solid principles, retirees in this century need to also consider market conditions, increased life expectancies and asset allocation. There’s no perfect substitute for the 4% rule. Even the creator of the rule later refined it to be the 4.5% rule, and has said its effectiveness could change in different situations.”
So if 4% isn’t enough, and 4.5% probably isn’t enough, then what’s the magic number?
“One alternative is the 6% method, which suggests retirees withdraw 6% of their savings at the beginning of the year to cover their living expenses but that they don’t take any cost-of-living raises in subsequent years that would increase their annual withdrawal above 6%,” Tan said. “The most recommended strategy is to work with a financial professional who knows you and your situation.”
That last bit of advice is truly timeless.
More From GOBankingRates