This is an article that anyone thinking ahead to retirement ought to read / listen to. The CNBC piece (click here to view) makes many of the points I have made to clients in our financial planning sessions regarding the danger of approaching retirement with unrealistic expectations.
To summarize, the piece makes the following very important points:
Working in Retirement. 50% of people say they plan to work in retirement in order to make ends meet. Only 15% actually do. If you think that "working until they put you in a box" is part of a sound retirement plan, think again! The article explains in much greater detail why this is a very dangerous, but very common, assumption (or delusion).
Stock Returns. Basing your retirement plans on recent high stock market returns is another dangerous assumption. With stocks near all time highs we agree fully with the authors of this article. We think it is prudent to assume only 5-7% for a stock heavy portfolio, and probably only 3.5 - 5% for an income oriented portfolio. I remember one client in particular who retired very young just before the Internet bubble burst. His simple assumption was that he would be able to earn 10% per year and "live on the investment income". Unfortunately stocks earned a real return of near 0 for the subsequent 10 years, forcing him to deplete his investment accounts far below his level of comfort.
Get Spending Under Control - Before you Retire! We have had clients who tell us to assume dramatically lower expenses in retirement. It's not so easy! Changing life long habits and expectations can be difficult. One of the most important things you can do to ensure your future financial security is to start a healthy budgeting routine. Learn to control spending now, while you are still working. Not only will the habit serve you well in retirement, but it may free up some extra cash to top off your retirement savings as well!