facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Unconventional Wisdom: Breaking the rules Thumbnail

Unconventional Wisdom: Breaking the rules

Money skills are the survival skills of the 21st century. Since Sylvia Porter syndicated the first financial advice column in 1938, money advice has become ubiquitous. Everywhere you look, you can find someone telling you what to do with your money. Whether you’re seeking tips on investing, saving, budgeting, or spending, ask your family, friends, or that trusty guide named Google, and they will all be happy to educate you with a treasure trove of wisdom. But as with many things in life, what may be the perfect answer for one person can be the absolute wrong answer for someone else. In the vast sea of money rules, there are those you should follow and those you should break. Making the right choice depends on one thing: you

Building a lifetime of financial security is no simple task. It requires discipline, commitment, and (especially for investing) time. When done right, planning involves an abundance of small decisions that work together to achieve success. How much should you stash away in your 401(k)? When is the right time to start saving in a 529 plan? Should you buy or rent? When should you retire? Every question is important. And every answer depends as much on the numbers as it does on your own needs, values, and feelings about money. 

So which advice should you follow, and which should you leave by the wayside? In working with clients of every age and financial standing, here are five off-the-rack pieces of money advice that need to be uniquely tailored to you:

  1. Don’t pre-pay your mortgage. Investment returns are higher than mortgage rates.
    This one is near and dear to my heart. I paid the last dollar on my mortgage in March 2018, a decade after deciding to double up on my payments. Writing that final check meant that I was debt-free. I felt the weight lift off my shoulders. Today, my fixed expenses are low, giving me complete discretion over my spending and the freedom to take more risk with my investments (which typically leads to higher long-term returns). Could I have invested that extra cash and made a bigger return over the last ten years? Maybe. For me, pre-paying my mortgage was an emotional decision. From my perspective, it was the right choice. On the other hand, I recently advised a pair of retired clients to pay their mortgage slower to free up cash for their life—which was the right choice for them. (For more thoughts on paying down debt and paying off mortgages, read What will you be celebrating this time next year? It’s all about your focus.) 
  2. Wait until age 70 to collect Social Security.
    Conventional wisdom is to wait until age 70 to begin collecting Social Security. Between the age of eligibility at 62 and your 70th birthday, you can increase your annual benefits by 8% per year. Delaying your claim eight years can increase your annual benefit by as much as 76%! Claiming later seems to be the smart thing to do—as long as you don’t need Social security in your 60s and you expect to live long enough to make the most of that extra income later on. If delaying Social Security adds financial stress to your life today, you may be better off taking the lesser amount now and enjoying the boost to your income starting as early as possible. And if you are married, there’s even more to consider. (To read more about why it often makes sense to wait if you can, read Social Security and women: tackling the challenges.)
  3. Move to an income tax-free state.
    If you live in Southern California, relocating to a tax-free state could potentially reduce your tax expense by 10% or more. That’s more than pocket change when your retirement savings are limited and moving makes retirement possible and more comfortable. But what if you don’t need that extra income? Many tax-averse individuals choose to either move or establish residency in state income tax-free states such as Nevada, Washington, Texas, or Florida. For Californians willing to forego year-round sunny weather, culture, and infrastructure, a move is worth considering.  When your retirement savings are insufficient to support your lifestyle, moving because of taxes (or cost of living) becomes an option. However, remember that income taxes are only part of the tax equation. If you want to move to Florida or Texas, doing so can take your finances up a notch. But don’t let the ‘tax tail’ wag the dog when it comes to deciding where to live the last years of your life. (To learn more about how each state taxes retirees, check out this state-by-state guide.)
  4. Save money by downsizing in retirement.
    Living in a family-sized house once your family shrinks down to a family of one or two can seem extravagant. When you don’t need the space, why pay for that extra real estate and the bills that go along with it? On the flip side, if you own a home in Southern California, downsizing may prove to be economically impossible. Home prices don’t vary that much, so creating a meaningful economic impact usually requires relocating to an area where homes are less expensive. In my case, I could sell my larger home and buy a smaller one, but after transaction costs, moving costs, and the potential change in property taxes, it would take quite some time for the decision to pay off… unless I want to move far away from my daughter, friends, the ocean, and my beloved local theaters. For me, the choice is to stay put. (For more on weighing the pros and cons of moving, read Is moving closer to your (grand)kids the right leap?)  
  5. Take less investment risk in retirement.
    Risk is a tricky topic at any age. In retirement, it gets trickier than ever! Conventional wisdom says that your age determines changing your allocation toward safe bonds versus riskier stocks. For example, a 70-year old “should” have 70% in bonds. But there are three questions to ask about investment risk: 1) how much risk can I afford to take and also achieve my retirement goals? 2) How much risk do I need to take to keep up with inflation? And 3) How much risk am I willing to take so I can sleep at night?  Experience and analysis show that each individual has their own risk budget based on their nest-egg and personal decisions about their life choices. And, of course, no matter what your financial situation may be, if your level of investment risk is keeping you up at night, it’s time to make a change. (Want to read more on balancing risk and reward? Read What’s today’s best investment?)

So much data, so little information! There is so much “conventional wisdom” that is neither conventional nor wise. The most important thing to remember is that no off-the-rack or ready-made rule fits everyone. To be sure you’re making choices that are right for you, the best thing you can do is get bespoke advice from a Certified Financial Planner™ (CFP®). A CFP will take the time to understand your needs, walk you through each decision, and help you make the best possible decision for you—even if reaching your goals means breaking the rules.