7 Outdated Retirement Decisions People Are Still Making
Rules of Thumb Can Become Outdated - Here Are a Few That May Not Work
When it comes to money, things change at a snail's pace and that's certainly true of retirement decisions. Many retirement decisions are still made based on conventional wisdom. Sometimes, by luck, that results in the appropriate decision but often the result leaves the person with good results--not great. Below are 7 retirement myths still prevalent in the financial planning space.
1. Take Social Security Early – It Might Not Be There
Too many people still think they should take Social Security at the earliest age possible. This is an appropriate decision for only a small sector of the population. Particularly for someone who is married and was the higher earner, taking Social Security early could be harming your future financial security. Instead of “take Social Security early, take it when it financially makes sense. That means creating a detailed financial plan, often in consultation with a professional. This analysis should consider life expectancy, past and present marital status, spousal and survivor benefits, inflation, and one’s lifetime income needs.
2. Medicare Will Cover All My Medical Expenses
Many people think that once they turn 65 they won’t have to worry about medical expenses because Medicare will cover those costs. Although Medicare coverage begins at 65, it will only cover about half of your total health care related expenses. Instead of “Medicare will cover it," live in the mindset of Medicare being a piece of your total healthcare strategy. You will probably need a Medicare Supplement or Medigap policy to help close the gaps in coverage.
3. Don’t Withdraw From IRAs and Retirement Accounts Until Age 70 ½
For some people this makes sense, but for others, it is downright foolish. When you look at your retirement income as a whole, you think of all your assets and sources of income as puzzle pieces. Then, like putting together a puzzle, you put them together to create a picture. When you look at it this way, sometimes you get a better picture (as in more lifetime income) by withdrawing from retirement accounts earlier – not later. Again, the way to decide on the best time to withdrawal funds is to have a retirement plan that takes into account all sources of income.
4. Live Off the Interest and Dividends
Interest rates are not dependable and companies can cut dividends. Your financial assets are there to be used to create a comfortable lifestyle for you. When you stress-test your plan against various return, inflation and spending scenarios, you’ll often see that it is perfectly okay to spend principal at times. It would be nice to only live off interest and dividends but that might not be possible depending on your balances. It's a great goal but don't make a plan that revolves around the idea.
5. Pay Off All Debt and Don’t Finance Anything
Most companies maintain debt as part of a solid corporate finance strategy. Financially successful families might be better off pursuing a similar strategy instead of focusing efforts on debt reduction. As your assets grow, the amount of good debt you carry can grow also. For some people holding debt makes sense but if you've had a problem with debt in the past, or you currently have a high debt-load, don't go into retirement with large debt payments. If you're net worth is higher, holding some debt might make sense.
6. Take the Lump Sum
Many companies that offer a pension offer a lump sum payout option. Many people assume they are better off in control of the money and that they can earn a decent rate of return by investing that money. Pension plans are professionally managed, and when viewed in terms of possible outcomes and life expectancy, the lump sum option may not be the best choice. Your retirement funds are not where you learn to invest. If you will take a lump sum, give it to a financial adviser with a track record of proven returns or don't take the lump sum.
7. Plan As If You Won’t Live That Long
Life expectancy affects many retirement decisions. Too many people make a decision “just in case” they pass early, when in fact, statistics tell us the more likely outcome is that they will live longer. Financial decisions should be made, at a minimum, as if you live a few years past average life expectancy. Your future you will thank you for looking at it this way. Make plans as if you need to provide for the 88-year-old you because chances are, you'll live longer than you think.