Big Changes are Coming to Retirement. Here's How to Prepare

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Retirement is a concept that's always in flux.

Historically, it didn't exist. If you weren't an aristocrat, you worked until you dropped. The Industrial Revolution and the rise of consumer society changed all that. Soon we had lifetime jobs. Pensions. The promise of golden years on a beach.

And now that's all disappearing too. Pensions are an endangered species. Employment is contingent and usually short-term.

Retirement is being redefined as you're reading this.

This means it's critical that your retirement planning evolves with these changes.

So let's talk about why retirement is transforming -- and how to meet the challenge.

The changing face of retirement planning

Financial expert Bill Bengen devised a formula. It was smart. It was supported by data. 

And it soon became very popular.

In 1993, Bengen was combing through decades of financial data. He examined the market and inflation conditions of every 30-year period back to 1926. The goal? To see how much money a retiree could withdraw from his savings every year without going broke.

Bengen came to an interesting conclusion. Do you spend less than 4.5-percent? Then you're in the clear.

The "Four Percent Rule" was officially born. 

For 22 years, the rule has been retirement dogma. Withdraw 4.5 percent of your savings each year and your money will last.

Yet the wisdom of that rule is under fire. Michael Finke is an academic and financial planning expert. He just published a paper called "The Four Percent Rule is Not Safe in a Low Yield World."

Finke argues that Bengen's formula is outdated. He says we now live in a climate of high stock valuations and low bond returns. These conditions don't match any modeled by Bengen. 

So what's the solution if Finke's research is borne out?

One solution is a shift in allocation. The Four Percent Rule is based on a 60/40 split. Yet this percentage may not be ideal in a low interest rate, low yield environment.

Finke also raises the possibility of a deferred income annuity. Or, the simplest solution of all.

Spend less.

Bengen, too, has concerns about his rule. He told the New York Times a 4.5 percent spending rate may be too high. This is especially true for retirees with a strong position in bonds.

Bengen feels his rule is still a valuable benchmark. Yet even the father of the Four-Percent Rule feels it may need a bit of tweaking.

Sure, the Three-and-a-Half Percent Rule doesn't quite roll off the tongue.

It might, however, lead to a more stable retirement.

Avoiding crippling college costs

The joys of raising a family are legion. Yet supporting children in college and beyond is a nest egg killer.

College costs continue to spike. Even families with large holdings are often taxed. Four-year tuition often exceeds $150,000. Have three kids? That's nearly $500,000 that could otherwise fund retirement.

Financial aid isn't available to every student. That's why it's a good idea to examine a tax-advantaged 529 plan. Your contributions grow tax-deferred. Distributions to cover tuition come out tax free. 

The plans vary from state to state. Yet many states allow contributions of up to $300,000 per child. If you open a 529, you also retain sole control over pay outs.

Steps to take to keep your retirement on track

The "set it and forget it" era of retirement planning has been consigned to the dustbin of history. We're in a lower yield environment. We're living longer and staying healthier. Our attitudes about retirement have shifted.

So how do you ensure you're still on pace for a financially comfortable retirement? Consider taking following steps: 

  • Take advantage of the extra money someone over 50 can put in an IRA
  • Make a rigorous evaluation of your financial future
  • Plan for significant increases in health care costs
  • Settle on a Social Security strategy
  • Finalize an estate plan
  • Drop the Four Percent Rule and spend less
  • Shift your allocation away from bonds
  • Consider deferred income annuities
  • Open a 529 account for tax-advantaged college savings

The bottom line

Retirement has always been an elastic concept. It reflects the cultural and economic realities of each generation.

Tomorrow's retirement will reflect these changing realities. We're living longer. Health costs are rising. Pensions are being eliminated. Yields are very low. Cultural ideas have shifted. 

By taking the initiative, you can stay on top of these changes and make them work to your benefit. Many things may change, but there's always one constant.

If you're wealthy and healthy, you'll almost certainly be happy.

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