Most people have a lot of questions about retirement. But many individuals are focusing on the wrong questions, which could cause you to make costly mistakes or forgo opportunities. Here are four common questions that, while interesting, probably won’t help with your retirement planning.
1. Where can I get the highest paying CD? Some people approach finding the best CD rates as a part-time retirement job. It’s certainly a good idea to seek out good investments that get the most interest possible, but not if you spend hours to earn only a few dollars. Most CDs are paying about 1 percent in interest or less right now. But let’s say if you look very hard you will find a CD that pays 1.5 percent. If you deposit $100,000 in the bank and earn 1.5 percent instead of 1 percent, your annual return will increase from $1,000 to $1,500. An extra $500 may be worth your time. But if you can only deposit that money for 6 months, then the extra earnings goes down to $250. After tax, the bonus you earn is probably closer to $200. Over 6 months, that works out to be about $35 a month. And if you invest $50,000 instead of $100,000 in the CD, the extra interest is $17 a month. Don’t let shopping for the best CD rates distract you from the real work of creating a financial plan for retirement.
2. How have my investments done over the last 6 months? When you ask this question, you are basically trying to make an investment evaluation based on a very short period of time. But the nature of mutual funds and equity investments is that they perform well only over a very long period of time. If you have actively managed funds or an actively managed portfolio, there may be long periods during which your funds or strategy will underperform the overall market. A better question to ask yourself is if you have the right investment strategy to meet your long-term financial needs.
3. Did you get a big tax refund check? There is nothing wrong with getting a big tax refund check. Some people overpay the government on purpose in order to prevent themselves from spending the money they will get back. But a much more important question for your retirement plan is, “What is your marginal tax bracket?” Knowing your tax rate can help you make smarter decisions about how to invest your money.
4. How much monthly income do I have? This is a good question, but nowhere near as important as knowing what it costs you to live each month. Figure out how much, on average, you spend. This is the amount of money you will need to replace in retirement. I know plenty of people who earn over $200,000 each year who spend that $200,000 and more. They might have a great income, but they don’t have a very good credit score. How much you earn only matters relative to how much you spend. I’d rather be someone who earns $75,000 and saves $25,000 than someone who earns $200,000 and spends $250,000.
Neal Frankle is a certified financial planner and runs Wealth Pilgrim, a personal finance blog that helps people make smart decisions about their money. As a start, he suggests that you strive to understand your credit score range.