Planning for retirement often requires a dynamic approach to decision-making, rather than following a cookie-cutter formula.
While saving as early as you can remains a wise mindset for retirement planning, some long-held retirement rules may hinder your dreams for life after work. These rules can serve as a baseline, but customizing your retirement plan to your specific needs is important to achieving your goals.
Paying Off Your Mortgage Before Retirement
Entering retirement mortgage-free is a long-held belief that many preach. The wisdom makes sense, on one level, as it eliminates debt, which can be particularly important for retirees on a limited budget.
“Our ancestors established the expectation that you should pay off mortgages before you retire. That rule was based on interest rates from decades ago, some of which reached double digits,” said Jason LaBarge, president and financial advisor at LaBarge Financial.
LaBarge points out that it’s time to shift that narrative as interest rates have lowered over the years. Retirees following the pay-off-your-mortgage mindset may sacrifice investment returns, particularly if they have a relatively low interest rate.
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“If a mortgage has a lower interest rate, it typically doesn’t make sense to rush to pay it off when you can earn higher returns by keeping money invested in the stock market. This becomes even more important as retirees start tapping into pre-tax retirement accounts, which require taxes to be paid upon withdrawal,” added LaBarge.
Following a hybrid approach could be prudent for soon-to-be retirees anxious about carrying a mortgage into retirement, according to Schwab. Refinancing to a lower rate or making extra principal payments while also investing more can help reduce the mortgage without sacrificing returns.
The 80% Rule
Traditionally, retirement planning advice promotes the 80% rule. It’s a simple idea: Americans will need roughly 80% of their pre-retirement income to maintain their current lifestyle in retirement. According to Kiplinger, this rule is no longer valid as more Americans want to be active in retirement.
LaBarge concurs, saying, “The 70 to 80% rule is outdated because it’s a generalization that doesn’t take into account enough factors.”
Again, this is why customization is vital in retirement planning to achieve the kind of life you want. The financial advisor notes that he advises clients to follow a red money and green money approach.
“Green money is the funds required to live, including food, housing, utilities and other necessary expenses. Red money is play money, like vacations and boats. Retirees should make sure they have enough income to manage their green money before they focus on red money, and that depends on their expenses, not on their pre-retirement income,” noted LaBarge.
Creating a retirement budget helps work within this mindset.
“I encourage my clients to figure out what their necessary expenses are and build a budget. Once they have determined that, they can start saving money toward a specific goal,” added LaBarge.
Following the 4% Safe Withdrawal Rate
The 4% rule is another long-held approach to retirement planning. It follows a simple idea: Withdraw 4% of your total portfolio in the first year of retirement, then adjust it annually for inflation.
Rigidly following the rule can create problems in retirement, according to CNBC. LaBarge suggests that it’s important to tailor your approach to this age-old philosophy.
“The 4% rule remains a good rule of thumb, but each individual should evaluate their financial situation individually,” said LaBarge.
Creating a customized strategy can help maintain income.
“While the 4% rule may still be relevant, there are different retirement strategies that can help retirees maintain their income. Annuities with an income benefit rider are a useful tool to guarantee lifetime income rather than worry about the 4% withdrawal rule,” noted LaBarge.
That’s merely one approach. Speaking with a trusted financial advisor can help retirees create a plan that works well for them.
Final Take To GO
You only have one chance at retirement. Time has changed some commonly held retirement rules.
“More information is readily available than ever before, and it’s important to work with a financial professional to help you navigate the retirement landscape based on your individual situation to make the most of your retirement savings,” added LaBarge.
Consult with a financial advisor to tailor the approach that lets you enjoy the lifestyle you want in retirement.
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This article originally appeared on GOBankingRates.com: 3 Traditional Retirement Rules You Can Ignore Now
