In certain cases, taking a less traditional route may be a better financial fit.
It’s human nature to want to take mental shortcuts, but when it comes to important retirement decisions, relying on general advice instead of getting tailored recommendations from a credentialed professional can lead to less-than-ideal outcomes.
Here, we explore three scenarios where your specific situation trumps general guidance.
Conventional advice: Don’t claim Social Security at age 62
Hear ye, hear ye. Claiming Social Security early translates to a 30% smaller check if you claim at age 62 but your full retirement age is 67 (when you’re able to collect 100%). However, for a select few, claiming early may be worth it.
An example is someone who is wealthy and plans to retire at 62 and live off large withdrawals from pre-tax retirement accounts. This will push them into a higher tax bracket than the alternative – taking Social Security payments at 62 to reduce the amount withdrawn from those accounts. Claiming early also gives retirement assets room to continue compounding. Plus, your tax bill could be smaller due to the tax treatment of Social Security income. Finally, the extra income can enhance what financial planners call the “go-go” years, a period at the beginning of retirement when we can expect to have the most time and energy.
On the other hand, delaying Social Security can act as longevity insurance, if outliving your money is a big concern. Those who decide to defer their Social Security benefit earn delayed retirement credits, starting the month they reach full retirement age, or FRA (currently 66 and rising to 67 for people born in 1960 or later). For every month you delay filing between your FRA and age 70, Social Security increases your eventual benefit by two-thirds of 1% – a total of 8% each year you wait.
The bottom line: There’s no single optimal time to claim benefits that fits everyone. It’s your money, so get some tailored advice to make your retirement income work best for you.
Conventional advice: Sell your home and downsize
Because housing plays a major role in personal finances and wealth, experts like to recommend shrinking your expenses by shrinking your square footage.
If you do plan to downsize, keep in mind the transaction costs that can eat into the profit from selling a home. If you are set on moving in retirement, think about selecting a place with practical amenities that make aging in place easier, such as a step-free entryway and shower.
Some retirees choose to upsize to a home suited to multigenerational living, welcoming aging parents, adult children and even grandkids into a shared space. Others choose to relocate to a home of similar size in an area with a lower cost of living to increase their spending power. Still others plan to stay put indefinitely due to their attachment to a place they’ve made memories in, regardless of cost.
The bottom line: This highly personal decision is, at its core, about the lifestyle you want. Don’t cram yourself into a tiny home if you need room to spread your wings.
Conventional advice: Pay off your mortgage before retiring
Zeroing out a big debt like a mortgage feels like a giant weight lifted. But if you let the enthusiasm for zeroes cloud your vision, your paid-off house might become a less comfortable space, with liquidity locked inside.
Let’s say you use the majority of your savings to pay off your mortgage. Now you own your home free and clear – but the next time you have an emergency or a big opportunity, you may have a more difficult time coming up with the cash.
Before you pay off the mortgage, take a realistic look at whether your house will suit your needs in retirement or if you’d rather relocate. Even if you’re sure you’re not going to move, you still might prefer to maximize your income by investing your money instead of using it to pay off low-interest debt. There’s also the ability to deduct the interest you pay on a home loan on your taxes to consider.
The bottom line: Find the right financial fit, whether it’s paying off your mortgage now or later.
Whether you end up going with the conventional advice or going your own way, a credentialed professional’s guidance can help you make the most of your resources – and help you find the lifestyle that feels just right for you.
While we are familiar with the tax provisions of the issues presented herein, we are not qualified to render advice on tax matters. You should discuss tax or legal matters with the appropriate professional. Sources: ssa.gov; Center for Retirement Research at Boston College; bankrate.com; AARP; Bureau of Labor Statistics, Raymond James Commentary & Insights.
Tom King CFP®, CLU®, AEP® is Registered Principal of King Financial Partners (222 Blue Course Dr., State College, PA). King Financial is a team of credentialed professionals specializing in retirement, investment management, wealth transfer, and estate planning. Tom can be reached at Tom@goKFP.com (814) 234-3300.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.© 2021 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. King Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services.
