Plan to spend less in retirement than when you were working…hold off starting Social Security payments as long as possible…US Treasuries are the safest investment you can make. When it comes to investing and financial planning, conventional wisdom like this will keep your money safe and help you make optimal decisions.
Wrong! say Bottom Line’s top financial advisors. The problem with these rules of thumb? While each does contain a kernel of truth and help simplify decision making, they often introduce risks that you may not be aware of.
We asked five of our top financial advisors to list the most common pieces of conventional wisdom they disagree with—and what they tell their clients to do instead…
Conventional wisdom: Hold off taking Social Security until age 70. For each year you put off claiming Social Security up to that age, you earn about 8% higher monthly payouts for the rest of your life.
What our expert says: If you are still working, consider waiting until at least full retirement age (66 or 67 depending on when you were born). Consider starting Social Security earlier if you are retired but have a large enough nest egg that you don’t need the money to live on. Her reasons…
The Social Security program has a $22 billion annual deficit and is projected to stop paying full benefits by 2034, so consider claiming your payments sooner rather than later. Sure, Congress likely will save it, but taxes on benefits may have to be raised and/or wealthier retirees could get reduced benefits.
Consider the “break-even age.” In other words, compare if you took Social Security benefits earlier with smaller payments to taking them later with larger payments. At what age would you receive the same total amount of money with the larger checks starting later as you would have if you’d been receiving smaller checks but for longer?
The exact answer depends on a few factors, but if you wait until age 70, you’ll likely be in your mid-80s before you break even. If you choose early payouts and invest that money in the stock market, the break-even point is closer to 20 to 25 years. In that way, the earlier benefits are worth more. Helpful: Use the Break Even calculator at SocialSecurityIntelligence.com/calculators to compare the financial benefits of filing for Social Security early or later.
Crystal Garrett, CFP, is senior vice president at Tiras Wealth Management, which manages more than $2.4 billion in client assets, Houston. TirasWealth.com
Conventional wisdom: Older folks should not convert traditional IRAs to Roth IRAs. That’s because a conversion requires paying a large tax bill upfront, so this strategy takes many years to “pay off,” which is not until the tax savings from your future Roth IRA withdrawals surpass your initial outlay to the IRS.
What our expert says: Some retirees with sufficient assets to fund their lifestyle plan to leave their IRAs to their heirs as an inheritance. But: Beneficiaries who inherit a traditional IRA also inherit your tax. Not only must they pay ordinary income taxes on the distributions, but Congress now has mandated that the heirs deplete the entire inherited IRA within 10 years, forcing them to take large annual distributions that could push them into a higher tax bracket. If you pay the conversion taxes now, the Roth IRA you pass on after your death is a tax-free gift to your loved ones. And while you are alive, you still have access to your Roth as an emergency fund if you need it.
Bob Carlson is editor of the newsletter Retirement Watch and a managing member of Carlson Wealth Advisors and chairman of the board of trustees of the Fairfax County (Virginia) Employees’ Retirement System from 1995 to 2023.
RetirementWatch.com
Conventional wisdom: Plan to spend less in retirement than when you were working. People tend to base their retirement budgets on their current monthly recurring bills, which typically fall after they stop working because they no longer have to save for retirement, have no commuting costs and have paid off their mortgages.
What our expert says: When planning your retirement budget, you also should factor in the irregular “lumpy” expenses that occur throughout the year including car repairs, dental work and home maintenance. These expenses aren’t predictable, but they are very likely to keep occurring. Other overlooked costs in retirement: Rising property taxes…lengthier vacations…adult children who are still dependent (according to a Savings.com survey, nearly half of American parents continue to support their grown kids financially—nearly $17,000 a year, on average).
Look at your annual expenses for the past several years. Amortize the lumpy costs over 12 months to get a more realistic figure of your annual costs. For most of us, this more comprehensive and realistic monthly spending figure doesn’t drop at all in the first 10 years of retirement.
Cheryl R. Holland, CFP, is founder of Abacus Planning Group, which oversees $1.6 billion in client assets, Columbia, South Carolina. She is a member of Barron’s Hall of Fame for advisors who have appeared in the magazine’s annual Top 100 Advisor Rankings for 10+ years. AbacusPlanningGroup.com
Conventional wisdom: When you retire, hold less stocks and more bonds in your investment portfolio.
What our expert says: It’s certainly a smart idea to reassess your portfolio allocations when you hit 65 or retirement age. But there are more useful and accurate ways to determine the amount of investment risk you should be taking. Many clients find that they don’t have to make radical changes at all because their risk profile hasn’t changed. Your risk profile has two components…
Capacity for risk. Ask yourself, If my portfolio value fluctuates, will I have enough cash flow to leave my investments alone and let them recover?
Tolerance for risk. Ask yourself, Will market fluctuations lead me to panic and make bad decisions like selling at market lows?
—Cheryl R. Holland
Conventional wisdom: US Treasuries are the safest investment you can make. They are a terrific haven for any small investor if your goal is to hold the bonds to maturity, collect the annual yield and have the initial investment returned in full. There is virtually no risk for default because the bond is backed by the full faith and credit of the US government.
What our expert says: Default is not the only risk you need to protect against. Treasuries expose you to three other potential risks depending on how you use them, including…
Interest rate risk if you sell them before maturity. Like all bonds, the value of a US Treasury fluctuates on the secondary market. When yields on new issuances of comparable bonds rise, the value of your bond falls. The longer the term of the bond, the more dramatic the price fluctuations.
Reinvestment risk if you sell them upon maturity. One-year Treasuries look very attractive now with yields at around 5%. But when your principal is returned in 2025, short-term yields may be much lower and you may face a tough investment decision about where to put your money next to get decent returns.
ETF risk if you opt to use an exchange-traded Treasury fund rather than purchase individual Treasuries. ETFs provide instant diversification, but because their underlying holdings are constantly maturing and being reinvested, they have no set maturity date. Depending on when you cash out your shares, you’re not guaranteed to get back all of your initial investment. Example: The popular iShares 20+ Year Treasury Bond ETF (TLT) has lost about 36% of its value over the past three years.
Eric Amzalag, CFP, RICP, is founder of Peak Financial Planning, a fee-only advisory, Woodland Hills, California. ThePeakFP.com
Conventional wisdom: Avoid drawing on your tax-deferred accounts for as long as possible in retirement. The rule of thumb is to tap taxable accounts first for living expenses…then tax-deferred accounts like a traditional IRA…and, finally, tax-free funds such as a Roth IRA so they have the maximum time to grow.
What our expert says: When you start to draw down your various retirement accounts, the goal should be to minimize your lifetime tax liabilities. Examples: If in one tax year, you are close to the threshold of being bumped up into a higher tax bracket, it may make sense to take distributions from your Roth IRA. If in another tax year, you have much lower income than usual, tap your traditional IRA. Even if you don’t need the money to live on, taking more than what is required from a traditional IRA can minimize taxes when you start taking required minimum distributions (RMDs) in your 70s.
—Bob Carlson
Conventional wisdom: To find a good financial advisor, ask friends and family members who they use.
What our expert says: The word-of-mouth approach is why so many people wind up paying hefty fees to brokers for mediocre performance or, worse, get burned in Bernie-Madoff–like scams. Anyone can call themselves a financial advisor. Getting recommendations from friends or family members assumes that their financial situation is similar to yours and that they have done their own thorough vetting of the advisor.
Better way to look for a financial advisor: Search for one in your area using Wealthramp.com, FeeOnlyNetwork.
com/me-financial-planner or NAPFA.org. These are reputable sites that ensure advisors are fiduciaries. Any advisor found on these sites will be registered with SEC or state regulators and is legally bound to put your best interests ahead of their own…are compensated only by their client via a fee without earning commission of any kind for product sales or referrals and are not affiliated with any brokerage firm, bank or insurance company…and have knowledge and expertise in the specific areas you need help such as estate planning or retirement investing. To check whether investment advisors have any past infractions or complaints, go to AdviserInfo.sec.gov.
Plan to interview at least three advisors in person. NAPFA offers a handy checklist that includes questions to ask at your meetings.
