7 Outdated Retirement Decisions People Are Still Making

Rules of Thumb Can Become Outdated - Here Are a Few That May Not Work

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Please, avoid these outdated retirement decisions. H. Armstrong Roberts/Classic Stock

Many retirement decisions are still made based on conventional wisdom. Sometimes, by luck, that results in the appropriate decision, but often times the result is not as good as it could have been if a more thoughtful approach had been taken. Below are seven retirement beliefs that I still hear all too often. With each item, I’ve replaced what I typically hear with what I wish I would hear.

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. For many people, 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 because you never know what may happen” I wish I would hear “Social Security should only be claimed after a personal analysis is done. 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 much 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 hearing “Medicare will cover it” I wish I would hear people say “you must put together a health care budget for various insurance and out of pocket expenses in retirement."

3. Don’t Withdraw From IRAs and Retirement Accounts Until Age 70 ½

I still get emails from readers telling me they are absolutely not going to withdraw from their retirement accounts until 70 ½, when required minimum distributions begin. For some people this makes sense, but for others, it is downright foolish.

When you look at your retirement income holistically, you think of all your assets and sources of income as puzzle pieces. Then, like putting together a puzzle, you decide how to put them together to create the best 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. Instead of following conventional wisdom I wish I would hear people talking about the importance of a personal analysis that helps them get the most out of their retirement money.

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. Instead of hearing how people “won’t touch the principal” I wish I heard people talking about how they had stress tested their income needs and thus they knew how much they could withdraw each year regardless of the amount of interest or dividends paid that year.

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. Instead of hearing higher net worth folks talk about paying extra on the mortgage, I wish I heard more talk about how to use smart debt as part of a strategic financial plan.

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. Instead of hearing people talk about taking the lump sum I wish I heard more people run a thoughtful comparison of the lump sum vs. annuity options before making a decision.

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. Instead of hearing people say “I might not live that long” I wish I heard more people make decisions that would put the 88-year-old them in the best financial situation possible.