When it comes to your retirement and money, you’ve probably heard that you should spend as little money as possible once you are retired. Or, that you should wait as long as possible to touch your retirement accounts. But, it can be hard to know what a myth is and what the truth is when it comes to financial retirement advice.
It is time to break down what conventional logic has told us and get real about what you truly need to know to not only retire comfortably, but also to enjoy your retirement.
Myth
The key to a comfortable retirement is saving money leading up to your retirement.
The Truth
The key to a comfortable retirement is what you plan to do with your assets during your retirement. The problem is, many people who have saved enough money to retire never put a plan in place to carry out their retirement dreams with financial confidence. The first half of your financial life is the accumulation phase. Time is on your side. Many people do not realize, once they retire, the strategies that helped them accumulate assets in the first half of their financial lives may not work as effectively during the second half. The second half of your financial life is about the three Ps – protecting, preserving and passing along your assets.
Myth
Pay off your mortgage as soon as you can.
The Truth
Stretching out your mortgage can make a lot of sense. Cash flow is king in retirement. Paying more than you must toward a mortgage is counterproductive to cash flow and you don’t want to find yourself “house rich” and “cash poor.”
Myth
Leave your money in tax-deferred retirement accounts as long as possible.
The Truth
Having all your funds in tax-deferred retirement accounts leaves you vulnerable to higher taxes throughout your retirement. If you wait too long to withdraw funds, the government’s required minimum distributions (RMDs) could push you into a higher tax bracket. Taking more money than you need out of your retirement accounts can help you. By taking money sooner than needed, at the right age and time, it can help you avoid paying higher taxes later. A good rule of thumb: withdraw as much retirement money as you can within the 15 percent tax bracket.
Myth
Once you are retired, you should spend as little money as possible so you don’t run out.
The Truth
Spend your money any way you want in retirement — because that’s what it’s there for and because there is enough of it to do just that. It comes down to having the correct “first half” financial strategy to properly position you for retirement and then transitioning to the correct “second half” strategy. Having enough money for retirement requires “three buckets of cash flow.”
Bucket 1 – cash and liquidity. Money in your checking and savings accounts. This is cash that you can readily take out of a bank.
Bucket 2 – first-half investments. These assets are positioned for growth and income but also serve as backup in case you need to access money right away. For example, if you need a down payment on a car or a new roof for your house – these assets are typically accessible within three business days with no penalties.
Bucket 3 – second-half investments. These assets are specifically positioned to provide you with 100 percent of your retirement income when combined with any other income you are receiving on a monthly basis (pension, Social Security, etc.)
Myth
You will pay large amounts in taxes if you try to withdraw money from an IRA.
The Truth
Under the right circumstances and with the right planning, there are ways to withdraw money from an IRA while paying little or in some cases even no taxes. The way you manage your IRA distributions can impact what you pay in taxes. Tax-deferred IRAs and 401(k)s are an effective way to build wealth, but they are also ticking tax time bombs – The best way to defuse a ticking tax time bomb is with a smart income and distribution strategy.
Myth
Retirees have no need for life insurance.
The Truth
Life insurance can be a valuable tax-advantaged investment for retirees. Life insurance benefits can be passed to heirs tax free. Life insurance, if handled properly, can help transfer large sums of wealth to children and grandchildren tax free. In the second half of life you should look at life insurance as a wealth transfer tool.
Retirement is a time in your life that you earned. You deserve to enjoy that time. Be sure to be open-minded about your retirement financial strategies. By knowing how to tell the difference between a common retirement strategy myth and the truth, you will be able to make the smartest financial decisions for you and your family to enjoy your retirement.
Kevin Houser, CFP®, CES and Gary Plessl, CFP®, CPA are founding partners of The Houser & Plessl Wealth Management Group
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