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Retirement Reality Check: Which Rules Still Matter?

This story was first published on June 14, 2013. It is part of 12 Days of Wealth Management: The Year in Review.

CHICAGO -- Rules, as they say, are made to be broken. Yet as financial planning has grown as a profession, collective thinking has coalesced around a few solid pieces of advice. A panel at the Morningstar Investment Conference on Friday set out to debunk some of those rules and establish new guidelines. Here are a few of the biggest myths they tackled.

Myth 1: Stick to a firm 4% withdrawal rule. Most panelists seemed to agree that a 4% withdrawal rule was still a good starting point -- but they emphasized the need for constant evaluation. “We’ve looked at what you do once you’ve established a 4% rate, and then suddenly the market tanks and realism sets in,” said Christine Fahlund, senior financial planner at T.Rowe Price. “An advisor says, ‘I can’t tell my clients that they have to cut their budget in half.’” In the case of a market plunge, for instance, Fahlund recommends that advisors skip the annual withdrawal for up to five years; that also gives clients a longer time period to adjust their expenses. “We found that if you had to go even five years with literally a fixed income, many clients could manage that,” she said.

Myth 2: End-of-life costs are too uncertain to plan around. Get insurance for clients wherever you can, Fahlund recommended: If possible, she said, “allocate more to premiums -- especially longevity insurance, Medigap and long-term care.” Maria Bruno, senior analyst in Vanguard’s Investment Strategy Group, echoed Fahlund’s interest in so-called longevity insurance. “It’s an immature product, but the concept is very appealing,” she said. “We don’t think they’re for everyone; it’s for someone who’s really concerned about longevity. ... But there’s a tradeoff: You’re giving up a liquid pool of assets for a guaranteed income stream.”

Myth 3: Roths don’t make sense for wealthy clients.  Roth conversions can make sense at any age, Bruno said. In particular, clients whose annual income fluctuates may find a hidden opportunity. She suggested that advisors help clients take advantage of Roth IRA conversions during years that their income is abnormally low, because of the lower tax bill.

Myth 4: Wait as long as possible to claim Social Security.  In general, the panelists agreed: Clients should wait as long as possible. But, Bruno stressed, this is very much a client-by-client decision. “There are other things to think about,” she pointed out. Does the client need that money? If they don’t claim Social Security, are they going to be spending from their portfolio?” Then understand their personal health and longevity expectations, she pointed out. “If you have someone who is not in good health, that person might want to claim earlier.”

Myth 5: During a decumulation period, withdraw first from taxable accounts, then tax-deferred, then Roths.Not so fast, said Fahlund: “Our research shows you never want to deplete the taxable account.” Charitably inclined clients who are contributing to donor advised funds may want to have appreciated securities to give, while elderly clients may want to be able to use the step-up in basis for their legacy planning.

Myth 6: When retirement rolls around, clients who've saved regularly will be all set. Don't discount a significant adjustment period, Fahlund said. Encourage clients to try living a "practice retirement." That means when they're in their 60s, they should start doing some of the things they planned to do in retirement -- travel more, relocate to a warmer climate -- but also keep working, pay off debt and "get that emotional adjustment in place."

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