5 ill-conceived pieces of retirement advice

Solution No. 1: You can always work

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Not so fast, says Gail Cunningham of the National Foundation for Credit Counseling. While Cunningham agrees that working has many pluses — not only does it boost income, but it’s good for your mental and physical health — too many unknowns make it chancy to count on a job as part of your retirement package.

She says a lot can go wrong with plans to work into perpetuity:

• Your health can decline.
• Your spouse’s health needs may cast you into the role of caregiver.
• Your company may have other ideas.
• Circumstances could make a move away from your job’s location attractive.

Plan to work if you want, but don’t make it a necessary part of your financial equation.

“Continuing to work is a plus, but only if it’s on your terms,” Cunningham says.

Solution No. 2: Pay off the mortgage

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While getting rid of debt doesn’t seem like it could have a downside, there are circumstances where paying off a mortgage might not be such a great move.

Michael PeQueen, managing director and partner with HighTower Las Vegas, a financial planning firm, says the decision to rid yourself of a mortgage is often an emotional decision rather than a financial one.

Sure, a paid-for home can bring peace of mind, but it’s not always the right strategy. Depending on the interest rates involved, it might make better financial sense to invest the cash that would go into freeing yourself from your low-interest home loan and instead put your money into higher-yielding investments.

PeQueen explains how it works: “Let’s say a female becomes a widow in her early 60s. That could leave her 30 or 35 years worrying about inflation taking a significant portion of her portfolio. Locking it into a guaranteed low rate of return by paying off a fixed-rate mortgage really could cost her tens of thousands, if not more, over her lifetime,” he says.

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Solution No. 3: You need X amount a year

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You do the math and decide you need $80,000 a year to retire, so you want to put everything in relatively safe vehicles to generate that amount. Fine, but that’s based on the value of today’s dollar. What will it take to maintain your lifestyle in 10, 20 or even 30 years? It’s not that easy to quantify what you’ll need in the face of unpredictable inflation rates.

David Twibell, president of Denver-based Custom Portfolio Group, says when investors grab numbers out of the air, they often forget that their money — while theoretically growing over the years — will be worth a lot less based on inflation.

Consider that in January 1975, the inflation rate was 11.8 percent. March 1980 brought inflation up to a whopping 14.8 percent. The past few years have seen a relatively low rate of inflation, but some say that won’t last.

Even if it stays at a benign 3 percent a year, over time your purchasing power erodes significantly. A thousand dollars today would be worth $412 in 30 years.

That unpredictability is why Twibell advises against overloading your portfolio with fixed-return vehicles like bonds and annuities with a low rate of return.

“The typical response I get when initially talking about retirement planning is, ‘I just need $80,000 a year.’ Obviously, $80,000 today is far different from $80,000 two decades from now,” Twibell says.

Solution No. 4: It’s smart to downsize

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Getting rid of the big house once the kids are gone may seem like a good idea. But like any other type of financial decision, it’s good to crunch the numbers first and not simply assume that downsizing is right for everyone.

HighTower Las Vegas’ PeQueen says the fees to buy and sell a home, plus the costs of moving and preparing both homes for these transactions, can negate any financial gain for at least the first few years. And, PeQueen says, a smaller home doesn’t necessarily translate to a lower cost of living.

“In downsizing to a better location, for example, you have to factor in the increased costs, such as homeowners association fees and a higher tax rate,” he says, adding that surviving spouses often opt for downsizing because memories of happier times prove difficult and they want a new start emotionally.

“And that’s fine, but you also need to look at all options because holding onto their current home could actually be the cheaper option,” PeQueen says.

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Solution No. 5: Skimp on 401(k) savings

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Sometimes life pelts you with not-so-great surprises; you’re short on cash due to medical bills, home repairs or college expenses. Your budget is already tight, so how do you come up with the money you need? That 401(k) nest egg looks mighty tempting to tap, but you’ve heard enough times that it’s not a good idea. So how about lowering your retirement contributions to increase your income temporarily?

Experts say the solution to your cash flow problem may take some creative thinking (an additional part-time job, working overtime, selling something). But you should not sacrifice your 401(k) contribution.

“Stopping 401(k) contributions is convenient when times are tough,” says Ted Lakkides, CFP professional and founder of Cygnet Financial Planning, “but there are (plenty of other) items that can be trimmed off a budget if a person has the guts to look.”

Lakkides says it’s best to comb through current expenses to find that cash, but if lowering your retirement contribution can’t be helped, then avoid going below the employer’s match point. If you feel you must do so, maintain at least a 1 percent contribution, he says, and hike it to former levels or higher as soon as possible.

He provides this warning to those who do give in and lower their 401(k) contribution: Be prepared for major tax-time sticker shock.

“They will owe income taxes on the extra money they didn’t put in their 401(k)s,” he says.