Be Wary of These 5 Retirement Planning ‘Rules’: They Could Cost You Money
Everyone’s retirement planning looks different.
Some broad rules of thumb may be helpful as a starting point, but they don’t apply in every scenario. Following them too closely might result in catastrophic financial consequences.
Here are five financial retirement principles that every retiree — and soon-to-be retiree — should think about.
All debt is a foe.
One of the most common financial illusions, particularly in today’s low-interest-rate climate, is the necessity to pay off debt before retiring, according to Brian Hungarter, vice president and wealth adviser at Girard.
Not all debt is created equal: most financial counselors would advise paying off high-interest debt, such as credit cards, as soon as possible. And you surely don’t want to be saddled with educational debt when you retire.
However, not all debt is bad debt, and if it fits into your budget, it’s OK to retire with a mortgage or to get a loan from Payday Champion.
Indeed, it may be more prudent to let your investment portfolio develop than to pay off your mortgage right now. According to ValuePenguin, the average rate for a 30-year fixed-rate mortgage is presently 3.99 percent. According to Vanguard, the average yearly return on a 30 percent stock, 70 percent bond portfolio is roughly 7.7%.
“Can you produce money that exceeds the cost of borrowing?” Hunger expresses his opinion. He says it may be a viable approach if the profits are more than the borrowing expenses.
The majority of pensioners will need long-term care.
Savers should factor in the cost of long-term care when making financial retirement plans. However, according to recent research, the number of individuals who require long-term care isn’t as large as you may think.
According to specific government figures, a person reaching 65 today has a nearly 70% likelihood of requiring long-term care services and assistance throughout their remaining years. However, according to a recent analysis from Boston College’s Center for Retirement Research, fewer individuals need long-term care.
According to the findings, around one-fifth of retirees will need no assistance, a quarter would have strict requirements, and the remainder will have low to moderate needs.
“Many individuals will only need care for limited periods of time,” the researchers said, “and the cost in terms of money spent on official carers or time spent by informal caregivers would be small.”
Everyone may benefit from the 4% withdrawal rule.
A general rule of thumb for retirement spending is to tally up all of your assets and remove 4% of the total during your first year of retirement. You modify your withdrawals to account for inflation in the years after that.
This isn’t inherently bad, but it shouldn’t be applied to everyone.
“It relies entirely on what your objectives are and what you’re attempting to achieve,” Hungarter explains.
For example, if a couple that owns a private firm retires slowly to sell the company in two to three years, they will have illiquid money in the company. If they predict a greater payout when they sell the firm, they may gradually start drawing down more from their current liquid capital — say, 5%.
Retirees with high fixed costs, on the other hand, may want to consider a withdrawal rate closer to 3%, according to financial counselors, since they won’t be able to cut down on their spending if the market falls.
Hungarter says that guidelines like the 4% rule should only be used as a starting point for a more in-depth discussion about a financial strategy tailored to your circumstances.
You should strive to replace 80% of your pre-retirement income.
Another popular guideline is to support your retirement. You’ll need around 80% of your pre-retirement income. According to the theory, you won’t need 100 percent since you won’t be saving for retirement in retirement, and you won’t have work-related expenditures like commute and dry cleaning. While not incorrect, this advice does not provide the whole picture.
According to Silvia Tergas, a financial adviser at Prudential Advisors, “people’s income needs vary widely” and “should reflect your individual costs and what you want your retirement to look like.” You must examine both your fixed and variable expenditures, which include housing (from your mortgage or rent to property taxes and homeowner’s insurance) and health care, as well as your discretionary spendings, such as vacation and apparel.
It might be risky to follow the 80 percent rule without considering your situation’s specifics. With so much free time on their hands, some early retirees wind up squandering all of their previous earnings.
Furthermore, fully adhering to the norm may encourage some retirees to work longer than they need to. Tergas says, “And it can offer others a false feeling of security.”
When you retire, you should claim Social Security immediately away.
Many retirees rely on Social Security as their principal source of income, but that doesn’t mean you have to start collecting benefits as soon as you stop working.
“If you don’t need it, it’s typically a good idea not to accept it,” adds Hungarter.
That’s because, although you may start getting your retirement benefit as early as age 62, if you don’t wait until your full retirement age, which is now 67 for anyone born in 1960 or after, your check will be permanently decreased.
If you were born in 1960, for example, your retirement benefit will be cut to 70% of the entire amount if you begin collecting it at the age of 62. If you wait until you’re 65, that number jumps to about 87 percent, and if you wait until you’re 67, it jumps to 100 percent. If you were born in 1960 or later and can wait until you’re 70 to claim, you’ll earn a bonus called “delayed retirement credits,” which boosts your monthly benefit to approximately 124 percent of what you’d get at full retirement age.
