Planning for retirement can be tricky, and most people can't do it entirely on their own. Enlisting the help of an expert or doing your own research online can be a smart financial move, but it's important to ensure you're receiving sound advice.
Inaccurate advice costs Americans approximately $17 billion per year, according to a 2015 study from the White House. So as you're planning for retirement, it pays to ensure you're receiving the most accurate and up-to-date information and ignoring these three outdated pieces of advice.
1. You have to pay off your mortgage before you retire
Some financial experts advise paying off all your debt before you retire. While it is a good idea to pay off high-interest debt like credit card debt -- which can be incredibly toxic to your finances if you let it build -- lower-interest debt such as a mortgage isn't as dangerous. In fact, in some cases, paying off your mortgage before you retire could actually hurt you financially.
If you don't have loads of spare cash lying around (because, let's face it, who does?), you'll need to prioritize your various financial goals. When you're planning for retirement, that could mean choosing between investing more cash in your retirement account versus paying off your mortgage.
To decide which one to prioritize, take a look at the interest rate on your mortgage and the rate of return you're earning on your investments. If you're paying a 4% annual interest rate on your mortgage, for example, while earning a 6% annual rate of return on your retirement investments, you should probably put more money toward your investments. If you were to pay off your mortgage instead of investing, you could be missing out on valuable investment gains.
2. You won't spend as much in retirement as you do now
The amount you expect to spend each year in retirement is an incredibly important figure, because it's the foundation of your retirement plan. A common guideline is to assume you'll spend around 75% to 85% of your current income in retirement, but blindly assuming this is how much you'll spend could be a costly mistake.
If you plan for retirement assuming you'll spend a fraction of what you're spending now, you'll be in trouble if your retirement costs end up being higher than you'd expected. And by the time you realize this mistake, it may be too late to do anything about it.
As you're planning for retirement, create a retirement budget to estimate your future costs as accurately as possible. You could end up spending less in retirement than you do now, but you could also spend more if you have several big vacations lined up or plan to take on loads of new hobbies. By tailoring your retirement plan to your unique situation, you can ensure you're as prepared as possible.
3. There's a "right" age to begin claiming Social Security
When it comes to choosing when to begin claiming Social Security benefits, you have several options. You can begin claiming as early as age 62, but your monthly checks will be reduced if you claim before your full retirement age (FRA) -- which is either age 66, 66 and a few months, or 67, depending on the year you were born. You can also wait until after your FRA to file for benefits, and you'll receive a bonus each month on top of the full benefit amount you're entitled to collect.
Some people say it's best to claim benefits as early as possible at age 62, while others recommend delaying benefits until age 70. The truth is that there's no one-size-fits-all answer as to when is the right time to claim benefits, because it will depend on your unique situation.
If you have a healthy retirement fund and can get by without a lot of help from Social Security, claiming early might be the way to go so you can have some extra spending money earlier in retirement. On the other hand, if your retirement fund is lacking and you need all the financial help you can get, it might be wise to delay benefits and earn those bigger checks.
It's also a good idea to consider your health. If you expect to live a very long lifespan, the fatter checks you'll receive by delaying benefits can help you continue living comfortably even if your savings run dry later in life. But if you have health issues or other reason to believe you won't enjoy a long retirement, claiming early will help you make the most of your benefits while you can.
It's not easy planning for retirement, especially when not all the advice out there is entirely accurate. By weeding out some of the more outdated tips, though, you can make sure your retirement plan fits your individual needs.