The New Rules of Investing for Retirement

October 12, 2021

Gold watch? Retire at 65? Stock percentage equal to 100 minus your age? It’s time to rethink the rules of investing for retirement. Here are the new rules.

Did you know that Social Security only covers about 40% of the average wage earner’s income after retirement? Or that most financial advisors say you need to plan to replace 70% of your income to live comfortably after you retire?

There are plenty of good reasons to avoid saving for retirement. After all, retirement may be decades away. But all those reasons come back to bite you when you’re finally ready to kick up your feet.

The good news? There are a lot of rules of thumb to guide you through investing for retirement. The bad news? Many of them are outdated.

It’s time to get smart. Here’s a look at the new rules of investing for retirement.

Plan for a Longer and Healthier Life

Over the last 160 years (since 1860) life expectancy has shot up. Back in 1860, the year Abraham Lincoln was elected president, the average life expectancy was around 39.4. In 2020, life expectancy hovers around an average of 78.9.

That’s important to understand because it shapes the outdated retirement rules we’re still using. Back in the 1950s, people retiring at 65 lived until 78 on the high end. Today’s retirees often live well into their eighties.

The good news is that you get to spend more time with your loved ones. The bad news is that you have to be able to afford to stay alive (morbid, but true).

While you can’t predict when you’re going to die, retirees should on average plan to live longer, healthier lives. This means you need your retirement savings to last longer and your health-related costs will go up the longer you stay alive.

Rethink Your Retirement Age

On a related note, it’s high time to rethink your retirement age.

These days, the “retire at 65” rule has few practical implications beyond eligibility for Medicare. However, while many retirees delay until 65 so that they can enroll in Medicare, the rule of thumb isn’t a reason to retire earlier. You can and should work beyond the age of 65—the longer you work, the longer you can go without relying on your retirement savings.

Plus, retirement is now a process more than an event. Our grandparents got the gold watch and a trip to the rocking chair, but today’s retirees (even affluent retirees) are more likely to replace their career with part-time work to help cover the bills for as long as possible.

Plan for More Than Financial Health

Of course, your financial health isn’t the only health you’ll have to contend with.

For one thing, many people now view retirement as a chance to take new adventures rather than settle in on the porch. But in order to achieve that growth, you have to be able to afford it.

In addition, keep in mind that your healthcare costs go up as you age. And if you happen to have a serious illness or injury, that can eat through your savings far faster than planned. Also, healthcare isn’t limited to your physical health—your social and emotional health evolves too, and you need to have resources to tend to it.

Look Beyond the 4% Rule

The traditional retirement rule of thumb is to withdraw 4% of your retirement savings each year. That way, you won’t run out of money in the first few years but you’ll still be able to take advantage of your savings.

Sounds logical, doesn’t it? Except that like many retirement rules, this one is due for reassessment.

First, understand that the 4% rule is not intended to calculate the ideal withdrawal amount, but rather the minimum safe amount. Second, the 4% rule is based on past market performance and tells us nothing about the future.

What does that mean for future retirees?

You can still use the 4% rule as a guideline, but treat it as a minimum safe amount. You should also keep an eye on annual inflation and adjust your withdrawals each year so that you’re withdrawing 4% accounting for inflation, rather than 4% in a vacuum.

Take Risks While You’re Young—and Keep Emotions in Check

Hey, we get it. It’s scary to take risks with your hard-earned money. The thing is that risk and return go hand-in-hand in investing. That doesn’t mean that you should take every risk in the hope of a return, but rather that you should meter risk based on where you are.

When you’re young, be willing to take bigger risks. You have more time to recoup your losses if you take the wrong investment and more time to take advantage of the magic of compounding. Then, as you age, gradually taper down your risk level and focus on capital preservation the closer you get to retirement.

Investing for Retirement with a Powerful Asset Class

In short? Today’s retirees need to make their money last longer. That means making smarter investments in the long run and taking advantage of high-performing assets.

That’s where we come in. At Masterworks, we believe that fine art investing should be accessible to everyone. That’s why we allow members to purchase shares in multi-million-dollar artworks (after research with CitiBank and Bank of America to identify high-performing artist markets). All you have to do is invest in art you love, and we’ll take care of the rest. Ready to invest for a brighter financial future? Fill out your membership application today.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.