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Five Essential Rules Anyone Close to Retirement Should Know

The closer people get to retirement, the more anxious they get about what the future holds. There’s nothing strange about this, it is a big change. After having worked for decades, transitioning to a life without the reassuring routine of work or a steady paycheck can be daunting. However, just like any change in life, one has no choice but to meet it head-on. Now, there are a number of rules that help people make sense of how to handle their money after they retire. 

Five Essential Rules Anyone Close to Retirement Should Know

Of course, these rules aren’t set in stone, and the fact that they work for some people doesn’t mean they’ll work for all. Nevertheless, it’s important to understand what they are, if only to identify which ones don’t align with your financial reality, risk profile, or future plans. Below, we highlight five of these retirement-focused rules, and they cover from investment planning to withdrawal strategies and estate planning. 

1. The 60/40 rule

This rule says that 60% of a retirement portfolio should be invested in the stock market while the remaining 40% is set aside for bonds and other “safer” asset classes. The thinking behind this is that bonds usually have a fixed rate of positive return but stocks may either yield gains or losses. As a result, if the stock market has a down year with negative ROI, the gains made from the bonds can keep the portfolio afloat. 

NOTE: While the 60/40 rule makes some sense in theory, in real life, it’s better to build a portfolio that fits your financial status and risk appetite. That way, you can decide your goals from the start and build an investment plan that works with it. 

2. The 90/10 rule 

The 90/10 rule was proposed by legendary investor Warren Buffett. It says 90% of a retirement account should be invested in low-cost index funds and the remaining 10% in low-risk government bonds. This is similar to the 60/40 rule highlighted above, but it’s more aggressive. Buffett believes the risk is worth it though, and since a retirement plan is long-term, a couple of bad years will have minimal impact, as long as there are many more years of positive stock market returns. 

NOTE: Another approach that makes sense on paper, but the cookie cutter nature means it may not work for everyone. Something else to keep in mind is that Buffett proposed this about 10 years ago, and the financial environment is no longer the same. 

3. The 95% rule 

Also known as the safe withdrawal method, the 95% rule was created by Bob Clyatt to provide some guidance on rationing retirement income. The rule says every year, a retiree should either withdraw 95% of the amount they withdrew the previous year OR 4% of their remaining retirement portfolio. Basically, you do the math (or have your financial advisor handle it) and choose whichever amount is bigger. There are two reasons for this: one, it helps you maximize your account and get it to last for 25+ years, and you maintain your standard of living year on year. 

4. The 50/30/20 rule 

This rule helps you allocate your income, spreading them amongst expenses in order of importance. It says 50% of one’s income should be spent on essential needs, 30% on wants (like-to-haves), and the remaining 20% on savings. So, the bulk of your retirement income should cover bills, obligations and unavoidable expenses. Then, the rest can be used for eating out or buying those items you’ve been eyeing for weeks. The last tranche is saved so you’re covered for unexpected expenses in the future. 

5. The 75 year rule

This final rule is an interesting one. So, when a person hits the 75 year mark, any pension benefits they leave for their beneficiaries will be taxed at a marginal rate. Depending on the size of the benefit, this rate could be more than 40%. That means ones’ dependents only get about 60% of money left behind. However, if that money is added to a trust or an estate before the account holder turns 75 years, it’s free from income tax. Of course, there are other complications around that, but a retirement planning expert could easily put you through. 

The most important takeaway is that retirement investment and planning is a personal process, and it’s essential to figure out what suits your preferences, risk profile, and future goals. If you need clarity regarding any of the rules above, you can speak directly to a retirement planning specialist. Just schedule a consultation via this link – it’s free of charge. 

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