3 Questions You Need to Answer Before Retiring

There are plenty of reasons people try to grow their wealth in the stock market, but the most common goal of investors has to be to build a sufficient retirement nest egg. Once you're on the home stretch, though, with a well-diversified portfolio and a reasonably manageable financial situation, a number of questions start to arise that you didn't have to deal with during the years when amassing assets with the order of the day.

In this segment from the Motley Fool Answers January mailbag show, hosts Alison Southwick and Robert Brokamp -- and special guest Sean Gates, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool -- dive into three common questions for retirees and near-retirees. How many times your annual salary should you have saved? Is the 4% rule the right way to go? And should you make an effort to pay off your mortgage before you leave the workforce?

A full transcript follows the video.

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This video was recorded on Jan. 29, 2019.

Alison Southwick: The next question comes from Robert, and it's for Bro. Robert writes, "I currently hold 92 stocks with the top 16 positions representing 68% of my total account value.

"I wish I could take credit for being a super stock picker, but the reality is that I've been able to follow the Stock Advisor and Rule Breakers recommendations, hold a lot more than I sell, invest routinely, and stay the course over time." Aw! "I can't say thank you enough for the guidance over the years as it has served me very well." Aw! After reading all that praise, let's move into the question.

"I'm four years away from the minimum age to draw early Social Security and my wife will be eligible to draw early Social Security in two years. We have a very reasonable mortgage that we could pay off if we liquidated our after-tax account investments but may not want to for tax purposes.

"I have three questions. (1) I have read several Guide to Retirement articles that suggest that you should have 10 times your current salary saved for retirement. Is that enough? (2) another guideline I've read is that you should draw only 4% annually from your accounts in retirement. Your thoughts on this. (3) Should we pay off our current mortgage prior to retirement or keep it to maintain some kind of mortgage interest write-off during retirement?" Are you ready to go back to No. 1?

Robert Brokamp: Yes, but before I do that I want to point out something else. So, Robert, you mentioned that you're four years from minimum age for Social Security and your wife is two years. That suggests that you might be planning to claim Social Security early. My first thing would be not to do that. In my interview with Larry Swedroe, his basic recommendation is to delay it. Definitely look into that. For most people that's the right thing to do.

The first question was the "Guide to Retirement" and that you should have 10 times your salary before you retire. That advice mostly comes from a very well-known Fidelity study and there are other studies that also generally support that one from DFA. Other studies recommend more. T. Rowe Price did a similar type of analysis and suggests that you should have 12 times your salary before you retire.

But the thing is these are rules of thumb, and there are lots of factors that would determine whether that's good for you or not. One of them is how much you were making before you retired. If you look at the 2018 recommendations from J.P. Morgan -- they have this great J.P. Morgan Guide to Retirement -- they would say 10 times is fine if you earn $75,000 a year, but if you have a household income of $150,000 you need 13 times your salary before you retire. The reason is because Social Security replaces less of your income the wealthier you are. That's just one example of how there are lots of factors that determine this, so definitely go see a qualified fee-only planner to get that answer for you.

The second question was whether the 4% rule makes sense and our thoughts on it. I keep threatening to do a whole episode on this and one of these days I will. I will say as a back-of-the-envelope rule of thumb, it's OK; but, generally speaking, it's also something that really depends on a lot of situations -- your age, your life expectancy, whether you're getting income from other sources. I would say it's fine if you're just doing a mental calculus of generally how much you could have in your first year of retirement, but I wouldn't rely on it exclusively.

And the third question was whether you should pay off your mortgage. You talked about being able to write it off as a deduction. I'm going to guess you're not actually going to be able to do that anymore. Because of the higher standard deduction from the new tax law far fewer people will be able to write off their interest. Plus, it sounds like you've had your mortgage for a while and as you own your mortgage, more and more of your payments are principal and not interest, so I wouldn't count on it for any sort of tax deduction.

If you have a lot of cash sitting around earning 1%-2% and you have a mortgage in which you owe 3.5%-4%, I'd say go ahead. You might want to do that. I feel less confident in terms of selling a bunch of stocks and paying the capital gains taxes to do that to pay off your mortgage. As a safe bet -- as an alternative to cash -- I think it's fine.

Sean Gates: The only thing I would add is this question looks similar to other questions we answer, insofar as you're in a sweet spot. There's a time frame between when most people retire and most people start to recognize most of their retirement income, and it's usually between five and eight years where you've officially retired. You're not claiming Social Security yet. You could delay or postpone that window. Maybe you have a pension that hasn't kicked in, etc. RMDs don't kick in until you're 70.

So there's this window where you can recognize income strategically to manage your tax bracket into retirement. I feel like this is where I add value to folks the most as a financial planner, as it's something that people don't know to ask. I think you're missing it, here, because you even said you're going to claim Social Security potentially early. If you delay, you get a bigger Social Security benefit and could harvest income from other retirement assets, pre-tax assets, strategically now to bridge you, and it would probably lower your lifetime tax liability. These are things that you should be thinking about as you prepare to see a qualified financial planner.