The New Rules of How to Retire in these Uncertain Times

We live in uncertain times today. To be sure, the old rules that used tell you how to retire in comfort, no longer really apply. The basic rules of how life is to be lived now, have changed. No longer is it okay to live happily today and save only a little. The mantra today to enable a comfortable retirement, is all about saving as much as you possibly can, and then cutting down on everything you can do without. Not only can you no longer not live above your means, the experts ask you to live below them. First, this lets you save more. And then, learning a low demand lifestyle helps you make the money you save last longer, once you retire. The more you get used to a lower level of living, the better your money will last you in retirement. Let us try to understand some of the new rules of thumb that tell you how to retire in reasonable comfort.

You’ve always been told that you needed to save 10% of your income for retirement. Those rules are changing somewhat. Today, the rule of thumb is that you should save 20% of your income. And that’s the lowball figure. You should save this, and more, if you possibly can make the sacrifice. What you need to plan for in retirement is an income level that reaches 85% of what you used to make while you worked. That 85% would include your Social Security, your pensions, and of course, income from your savings. With the way investments crashed over the past three years, you’re certainly going to need to be more cautious with where you invest. A more cautious investment plan will of course mean lower returns. And this is something you have to prepare for.

It isn’t enough to simply make sure that you invest. The secret of how to retire in today’s environment is all about knowing where exactly to invest your assets at any given time. Whatever money you have in tax-deferred accounts, like your IRA or your 401(k), you need to make sure that you invest it so that you get the best after-tax income possible. Whatever fixed income investments you have, those are certainly going to be subject to income tax; they should be in your tax-deferred account. Any equity investments you have that you’ll be paying dividend income taxes on, you should put in your taxable account.

This is about the right time to switch to a Roth. What you want is the freedom to withdraw money from whichever account of yours seems to have made the greatest after-tax income for you. Investing in a Roth alongside of other traditional investment destinations, you give yourself the freedom of withdrawling from whichever account pleases you.

And finally, the new rules on how to retire today require that you hedge your bets with guaranteed investments alongside of everything else. What are guaranteed investments? They are things like Treasury Inflation Protected Securities, Index CDs and the like. You get a guarantee that you will be paid an annuity for as long as you live. And that is a guarantee that is hard to pass up on.

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