When Should You Ignore Conventional Retirement Advice?
In certain cases, taking a less traditional route may be a better financial fit.
It’s human nature to want to take mental shortcuts, like following the crowd to find that best-selling gadget on Amazon. We read all the reviews and think “if it worked for all these people, it could work for me.”
But when it comes to important retirement decisions, relying on truisms instead of getting tailored recommendations from an advisor can lead to less-than-ideal outcomes.
Here, we explore three scenarios where your advisor can guide you in being a retirement rebel.
Conventional advice: Don’t claim Social Security at age 62
Hear ye, hear ye. Claiming Social Security early translates to a 30% smaller check if you claim at age 62 but your full retirement age is 67 (when you’re able to collect 100%). However, for a select few, claiming early may be worth it.
An example is someone who is wealthy and plans to retire at 62 and live off large withdrawals from pre- tax retirement accounts. This will push them into a higher tax bracket than the alternative – taking Social Security payments at 62 to reduce the amount withdrawn from those accounts. Claiming early also gives retirement assets room to continue compounding. Plus, your tax bill could be smaller due to the tax treatment of Social Security income. Finally, the extra income can enhance what financial planners call the “go-go” years, a period at the beginning of retirement when we can expect to have the most time and energy.
On the other hand, delaying Social Security can act as longevity insurance, if outliving your money is a big concern. Those who decide to defer their Social Security benefit earn delayed retirement credits, starting the month they reach full retirement age, or FRA (currently 66 and rising to 67 for people born in 1960 or later). For every month you delay filing between your FRA and age 70, Social Security increases your eventual benefit by two-thirds of 1% – a total of 8% each year you wait.
The bottom line? There’s no single optimal time to claim benefits that fits everyone. It’s your money, so get some tailored advice to make your retirement income work best for you. Social Security decisions should take into account many factors, including spousal and survivor benefits, so make sure to talk to your financial and tax advisors to find the strategy that best fits your situation.
Conventional advice: Sell your home and downsize
Because housing plays a major role in personal finances and wealth, experts like to recommend shrinking your expenses by shrinking your square footage. But this highly personal decision is, at its core, about the lifestyle you want. Don’t cram yourself into a tiny home if you need room to spread your wings.
Some retirees choose to upsize to a home suited to multigenerational living, welcoming aging parents, adult children and even grandkids into a shared space. Others choose to relocate to a home of similar size in an area with a lower cost of living to increase their spending power. Still others plan to stay put indefinitely due to their attachment to a place they’ve made memories in, regardless of cost. In 2018, AARP found that nearly two-thirds of U.S. adults want to stay in their current home for as long as possible.
If you do plan to downsize, keep in mind the transaction costs that can eat into the profit from selling a home. Your advisor can help you run the numbers to see what it takes for you to come out ahead. If you are set on moving in retirement, think about selecting a place with practical amenities that make aging in place easier, such as a step-free entryway and shower.
Conventional advice: Pay off your mortgage before retiring
Zeroing out a big debt like a mortgage feels like a giant weight lifted. But if you let the zeal for zeroes cloud your vision, your paid-off house might become a prison with liquidity locked inside.
Let’s say you use the majority of your savings to pay off your mortgage. Now you own your home free and clear – but the next time you have an emergency or a big opportunity, you’ll have a more difficult time coming up with the cash. You might even have to take out a home equity loan, and now you’re right back at square one.
Before you pay off the mortgage, take a realistic look at whether your house will suit your needs in retirement or if you’d rather relocate. Even if you’re sure you’re not going to move, you still might prefer to maximize your income by investing your money instead of using it to pay off low-interest debt. There’s also the ability to deduct the interest you pay on a home loan on your taxes to consider.
The question is whether the comfort of having reserves with a mortgage is more appealing than the comfort of owning a home outright, but with less money in the bank. If you’re having trouble deciding, talk to your financial advisor and consider your options.
Find the right financial fit
Whether you end up going with the conventional advice or going your own way, a professional’s opinion on your retirement income strategy could help you make the most of your resources – and help you find the lifestyle that feels just right for you.
Sources: ssa.gov; Center for Retirement Research at Boston College; bankrate.com; AARP; Bureau of Labor Statistics
While we are familiar with the tax provisions of the issues presented herein, we are not qualified to render advice on tax matters. You should discuss tax or legal matters with the appropriate professional.