Adulting, how many of you actually do it, especially when it comes to your finances? It takes effort when money is involved. As I have talked with clients over the past few weeks, I have thought about this term a lot because there is so much information going around about what you should or should not do concerning investing, the market, and retirement.
Basically, when you think about the future, you need to do some “adulting!”
Adulting means you are ready to take off any rose colored glasses you have on and really look, with the help of a trusted advisor, where you are going. It means you are ready to get a plan in the place and stick to it, so you will reach your goals.
Why Do You Need Advice from a financial advisor?
One person who called me recently had just received a lot of money from her mother’s estate. One of her first questions was, “Should I pay off my house mortgage or should I invest?” This is where true “adulting” comes into play. This may look a little different given the circumstances of our present interest rates.
When I travel, I always make a point of buying newspapers, which not too many people do today. But I do! The Wall Street Journal had an article in it that speaks to this subject.
Here’s the link if you are a subscriber. If not, you can still read a good portion of the article and get the idea that paying off your mortgage at this point may not be the best for you. It’s a numbers game and a trusted advisor can show you the best route to take.
Wall Street Financial Consultant Katy McLaughlin writes, “These days, if you want to pay off your mortgage when you retire, you’re going to take a lot of flak.
“That is because mortgage rates are currently at whistle-inspiring lows—the average rate across 30-year fixed loans in December was 2.93%, according to mortgage technology provider ICE Mortgage Technology. If you itemize and get a tax deduction for mortgage interest, you’re paying even less to borrow money.
“Meanwhile, if you were to invest the money instead of paying off the note, you’re likely to make a lot more. Over the last 10 years, portfolios invested 60% in stocks and 40% in bonds averaged roughly a 10% annualized return, according to investment research platform Morningstar Direct.
“On its face, paying off a low-cost loan when you could use that payoff money to grab a higher yield on an investment means leaving money on the table that could be useful in retirement. Once money is sunk into a house, it is illiquid, which can reduce your options if you face unexpected expenses.”
The other question I’m hearing a lot is: “Do I refinance since rates are where they are?” That’s almost a given if your interest rate is higher than 3 percent. But should you have a mortgage into retirement?
It is true that rates are super low. But beyond this . . . you need to find your right rate, itemize or standardize, what is it going to cost you in rate of return. A big piece of the puzzle is found when you discover what it’s going to cost you using the rule of returns.
Managing your retirement savings can be a balancing act. Some of you are not thinking about this but it is time to turn your attention this way. You watch your IRA grow thinking you can just sit back and enjoy the fruits of your labor and keep your current lifestyle.
What you find is this: Withdraw too much too fast, and you run out of money. Withdraw too little, and you may not get the full benefit of your savings. Following the 4% rule is a good way for many retirees to manage retirement withdrawals.
This rule says withdrawing 4% of your retirement savings each year (adjusted for inflation after the second year) is the best way to ensure your retirement funds won’t run out before 30 years.
So How Did the 4% Rule Begin?
It’s based on a 1994 study by William Bengen, an investment management specialist, who explored sustainable withdrawal rates for retirement portfolios.
Bengen examined withdrawal rates for 30-year rolling retirement periods from 1926 to 1963. The test determined that 4% is the highest initial withdrawal rate that would allow the retirement portfolio to last a full 30 years, regardless of market conditions.
For example, according to this rule, if you retire with $1 million in your portfolio, you’d withdraw $40,000 the first year. Going forward, you’d withdraw $40,000 plus inflation.
But if inflation in year two is 3%, you would withdraw $41,200. The additional $1,200 compensates for inflation, ensuring you can maintain your standard of living.
By keeping your portfolio invested, especially during your retirement years, you earn an average return over time. Your investments will grow, preventing you from depleting your funds too quickly.
If you’re unsure how much you can afford to withdraw each year without running out of funds, the 4% rule is a good starting point.
Of course, this rule doesn’t work for every retirement scenario. Some say the rule is too risky. The 4% rule assumes the retiree maintains a balanced portfolio of 50% common stocks and 50% intermediate-term Treasuries.
Past market performance is not always predictable. The 4% rule assumes the market remains stable and retiree’s expenses are consistent from year to year only increasing with inflation. But in reality, spending can vary from one year to the next.
Here is where “adulting” really hits home because the rule is based on a 30-year plan, which may not fit everyone’s retirement age and life expectancy. The Social Security Administration estimates the average life expectancy for someone turning 65 in 2021 is about 20 years, 10 years under the 4% rule’s time horizon.
Today Adulting is a verb! This is why you need someone you trust to walk you through this financial environment. For example, people who retire early may need to reduce their annual withdrawal to 3% to make the money last. There is much more to this rule and also to living life well.
As a trusted planner and financial advisor, I can show you how to create a plan that works and will work! Schedule a free 15-minute consultation with me and let’s get a plan in place for you that works today and way into the future.