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Bad Advice = Vanishing Retirement Plan

Here’s a rule of thumb that I’ve heard ever since I’ve been in this business that can surely lead you to financial ruins. Here it is… ” Take 4% out of your account per year at retirement age and you will never run out of money and your account balance should stay about the same.”  I back tested this rule personally starting in 2000 using the popular Vanguard Index 500 fund. You know the one that many tout for low fees. That’s a subject for a future blog. My back test used an account balance of 1,000,000.00 on January 1st 2000. Lets say you retired and now you want to take the 4% out of your account or 40,000 per year for your yearly income needs. The problem with this is something called sequence of returns. The last 12 years there were some good years but there were also some pretty bad down years in the market. Keep in mind that you still need that 40,000 per year for your retirement income needs. We are not even accounting for inflation here. Anyway on January 1, 2012 you would be left with 437, 436.88.  If you retired at age 62 now you are only 74 years old and a couple more bad years in the market is going to practically wipe out your account.  This is exactly why this old rule is not the way to go. There’s too many variables and there’s no way you can tell in this economy what the sequence of returns will be over the next few years.  It  may have worked in the 90′s but not now.

This is exactly the reason you need to see a retirement planning specialist. I’m not talking about any stockbroker or the guy that your neighbor says gave them a great stock tip. I’m talking about a retirement planning specialist that works on these types of cases everyday. A 2011 Smart Money Magazine article stated that the person that helps you accumulate those assets is probably not the best person to help you get thru retirement. It’s a whole different ball game once you reach those retirement years. Asset allocation becomes much more important than the latest stock market daily moves and what the hottest stock of the month is. Smart Money says even if you like your current financial planner you should still seek out one that specializes in setting up retirement income plans that will last thru your lifetime. It’s not just a simple….”take 4% per year and you’ll be o.k.” No at retirement you cannot afford to make a mistake. You can’t gamble on your neighbor’s stock market tip or that the new Facebook stock will make everything be o.k.

I hope that you will think about this beginning 5-10 years before you retire and begin to meet with the financial planner that works on these cases everyday. If you’re already retired it’s not too late. You can still tilt the odds in your favor and get on the right course so you can have the peace of mind that everything will be o.k. And isn’t that what everyone wants in retirement…..PEACE OF MIND!


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