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Published: Nov 05, 2021 8 min read
A mechanic fixing a retirement rocking chair
Kiersten Essenpreis for Money

Preparing for retirement looks different for everyone.

There are rules of thumb to help, but they're just that: generalities that may be useful as a starting point, but that don't apply in every situation. Following them too carefully could have serious financial repercussions.

Here are five financial rules about retirement that every retiree — and soon-to-be retiree — should reconsider.

Most retirees will need long-term care

When financially planning for retirement, savers need to consider the potential expense of long-term care. But a new study suggests the number of people who actually need long-term care or long-term care insurance isn't as high as you might have heard.

Some government reports say a person turning age 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years. But a new report from the Center for Retirement Research at Boston College found that fewer people need sustained, long-term care.

About one-fifth of retirees will need no support at all and about a quarter will have severe needs, with the rest facing low to moderate needs, the results suggest.

"Many people will experience only brief periods of needing care, and the burden in terms of the money spent on formal caregivers or the time spent by informal caregivers will be minimal," the researchers wrote.

All debt is the enemy

The need to eliminate debt before retirement is one of the largest financial myths out there, especially in today's low-interest-rate environment, says Brian Hungarter, vice president and wealth advisor at Girard.

Not all debt is created equal: Financial advisors will usually recommend trying to pay off high-interest debt, like credit cards, ASAP. And you definitely want to avoid heading into retirement with student loans.

However, not all debt is bad debt, and it's okay to retire with a mortgage if it's within your financial plan, Hungarter says.

In fact, it might make more sense to let your investment portfolio grow than to pay off the mortgage right now. The average rate for a 30-year fixed rate mortgage is currently 3.99%, according to ValuePenguin. But the average annual return on a 30% stock and 70% bond portfolio is around 7.7%, according to Vanguard.

"Can you make money in excess of what it costs you to borrow?" Hungarter says. If you can see returns greater than your borrowing costs, it might be a good strategy, he adds.

The 4% withdrawal rule works for everyone

A commonly accepted rule of retirement spending is that you should add up all your investments and withdraw 4% of the total during your first year of retirement. In the following years, you adjust how much you withdraw for inflation.

This isn't necessarily wrong, but it certainly shouldn't be blindly applied to everyone.

"It totally depends on what your goals are and what you're trying to accomplish," Hungarter says.

For example, if a couple who owned a private business were to ease into retirement with plans to sell the business in two to three years, they have illiquid wealth in the business. They could slowly start to draw down more from their existing liquid wealth — say 5% — if they expect a larger payday down the road when they sell the business.

Conversely, retirees with high fixed expenses might want to consider a withdrawal rate closer to 3%, financial advisors say, since they have no flexibility to dial back their spending if the market tanks.

Guidelines like the 4% rule should just be a starting point to a greater conversation about a financial plan that is specific to your needs, Hungarter adds.

You should aim to replace 80% of your working income

Another common rule is that you will need around 80% of your pre-retirement income to fund your retirement. You won't need 100% because you'll no longer be saving for retiring in retirement, the thinking goes, plus you won't have work-related expenses like commuting and dry cleaning. While also not wrong, this guideline is not the full picture.

The income that people need will vary greatly and should reflect your own expenses and what you want your retirement to look like, says Silvia Tergas, a financial planner at Prudential Advisors. You need to consider your fixed expenses, which includes housing (everything from your mortgage or rent to property taxes and homeowner's insurance) and health care, as well as your variable costs, which are discretionary expenses like travel and clothing.

Sticking to that 80% rule without considering the specificity of your circumstances could be dangerous. With lots of leisure time on their hands, some early retirees find themselves spending 100% of their prior income.

Plus, strictly following the rule could cause some retirement hopefuls to keep working beyond when they really need to. "And it might give others a false sense of security," Tergas adds.

You should take Social Security right when you retire

Social Security serves as a primary source of income for many retirees, but that doesn't mean you need to start taking Social Security right when you stop working.

"If you don’t need it, oftentimes it can make sense not to take it," Hungarter says.

That's because while you can begin receiving your retirement benefit as early as age 62, your check will be permanently reduced if you don’t wait until your full retirement age, which is now 67 for those born in 1960 or after.

For example, if you were born in 1960, your retirement benefit will be reduced to 70% of your full amount if you start receiving the money at age 62. And that figure goes up to nearly 87% if you wait until age 65 and 100% if you wait until age 67. And if you were born in 1960 or later and you’re able to hang on until 70 to claim, you’ll get a bonus — called “delayed retirement credits” — that pushes your monthly benefit to about 124% of what you would have received at full retirement age.

You can calculate how much your benefit will be reduced if you retire early, via the SSA’s website. Waiting, if you can, could be a good financial move.

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