Is All of this Terrible Retirement Advice?

Forbes likes to publish online slide shows in the personal finance domain. A recent slide show topic: “10 Terrible Pieces of Retirement Advice.” I read it and take issue with some of it. Let’s see if you agree or disagree with Forbes or with me.

The first slide trashes the rule of thumb that to determine an appropriate bond allocation for your retirement portfolio, subtract your age from 100.

I certainly agree with this. Indeed, in the realities of today’s economic world, the only retirement planning rule of thumb that I follow is that there are no rules of thumb. There are two primary reasons for this.

First, our circumstances are unique in terms of our retirement spending needs and wants. For many boomers, the margin of error between retirement success and failure has shrunk substantially.

Second, and more important, these rules of thumb were developed when the markets were more predictable and consistent. Unfortunately, many retirement planning “professionals” (and I use that term loosely) haven’t bothered to unlearn the rules and adopt newer, more relevant strategies.

The second slide mocks the belief that equities are risky and should be avoided as much as possible. This is the kind of mockery that clearly comes from folks who make their living selling equities to boomers. I have written extensively about this topic, often quoting Professor Zvi Bodie in the process.

Equities are indeed too risky to count on to meet your essential retirement needs.  If you are able to accumulate sufficient retirement assets to meet your eventual spending needs without equities, why take the risk? Yes, you do need to address the inflation problem but there are other strategies that can be used. Finally, you probably should evaluate your equity allocations differently during your accumulation phase and your spending phase. Maybe when you stop working and start spending down your nest egg you can take more risk, if you have secured what must be spent.

Slide four goes after boomers who use their 401(k) accounts as an emergency fund. Gosh, that’s a bad idea unless the emergency is imminent bankruptcy.

Slide five is a strange one. Apparently some folks are being told to minimize their insurance coverage to avoid being targeted with a lawsuit. What? Insurance is used to manage risk and retirement planning is all about risk management. Yes, plaintiffs in lawsuits look for defendants who are not judgment proof. But the only way to be truly judgment proof is to have no net worth. What kind of retirement strategy is that?

Slide seven attacks the belief that you will spend less and live more simply when you retire. This is another profit-motivated statement propagated by the investment industry. They don’t want you taking the pedal off the metal when it comes to taking investment risk.

We are not retired yet but we are already spending a lot less and I for one am living more simply. This is a state of mind which many of us adopt. When we get older, we are better able to appreciate what is important to us and shed the rest.

Slide nine may be the strangest of all, because it debunks the belief that being debt free in retirement is good for you.

Everyone who thinks having peace of mind in retirement is good, please raise your hand. Now, everyone who believes that having debt provides peace of mind, raise your hand.

Is your hand up?

The slide makes the tired argument that having low interest debt is an inflation hedge.  Yes, re-paying a loan with inflated dollars is a nice concept but only if the dollars you are committing to that repayment represent a smaller percentage of your income as time passes.  In other words, if your income is not increasing at a rate that exceeds inflation, those loan payments are hurting you tomorrow as much or more as they are today.

This argument  may be true for a younger employee on an upward career trajectory. But how can boomers be certain that their retirement income will increase each year at a rate that exceeds inflation? Even Social Security payments do not keep pace with the real world cost of living.

Those are my thoughts. What are yours?


Comments

  1. rich says

    slide seven. even though we too try to live a frugal lifestyle, annual expenses have been increasing at 4%/ year since 2005. Travel (gas), recreation, dental and those so called “one time” expenses are always increasing. There seems to be no end to the “one time” expenses,. They are just different every year. (home improvements, tires, repairs, insurance, invites to restaurants, airline tickets to visit elderly parents) These costs add about 20% additional to our essential or desirable needs every year.

    I see no end to these increases until sometime in our 70′s.

  2. Bill says

    You didn’t mention slide#3. Advisors that collect fees based on Assets-under-management hate annuities, since it directly reduces their fees. I think a good rule of thumb is that what is bad for advisors is good for their customers.

    On slide#2, holding stocks in retirement is like throwing a “Hail Mary” pass. It is unfortunate that many people are in the position of needing such divine intervention in their retirement plans. But I’m not sure it is good to mock a solution that increases someone’s chance of success from 0% to non-zero%. So I’m on the fence on this recommendation.

    I have to agree with their slide#7. We definitely feel our spending is constrained right now due to working, and that spending will increase dramatically when we retire. We just don’t know by how much; for planning purposes, doubling. All those deferred vacations, and places we’ve always wanted to visit but not when we can only stay a week. There are also lots of deferred home improvements, deferred until my wife has time to plan them and I have time to do them. But I agree that the motivation for the inclusion of this slide is the profit motives of the investment industry.

    Slide#9 assumes that you can borrow long-term at today’s low rates. Bulls..t. And borrowing to fund investments with a slightly higher return was a major cause of the 2008 crisis. The advisors make out, at the expense of the clients.

    (your post didn’t include a link to the Forbes slide show, like most of your posts do)

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