3 Retirement Rules to Consider Breaking

Rules of thumb are great, but treat them as a friendly nudge in the right direction instead of the ultimate truth.

By + More

David Ning
David Ning
From traveling off-season to having a garage sale late in the year when people are in the holiday mood, rules of thumbs help us save time and money by leveraging what others have learned through trial and error. After all, it's impossible to be experts at everything.

But often, rules of thumb are passed from one person to the next, losing details along the way until they are no longer appropriate for a good portion of situations. Here are several retirement rules of thumb to reconsider if you want to ensure the road to financial independence is as smooth as possible.

1. Never trust financial advisors who are only after your money. I'm a big advocate of people trying to learn how to manage a passive investment portfolio themselves, as there's not much a financial advisor can offer a prudent investor that can overcome the additional fees charged for that advice. But while investing theory is simple, maintaining and managing a portfolio is not easy. It's true that financial advisors are seemingly charging you for advice you can simply find online, but if a simple cup of coffee at the right time can keep you from making financially damaging trades, then I'd say the cup of coffee is well worth the cost, even if the sticker price seems high.

The key is to be completely honest with yourself to determine whether the extra fees will be worth the cost. There's no point thinking about the theoretical maximum if there's no way you'll reach it anyway. It's what you gain in practice that's most important.

2. Hold multiple years' worth of expenses in cash during retirement just in case the market turns on you. Many retirees will hold a large buffer in cash because it seems logical that they could draw on that fund to let their portfolio recover if the market takes a dive. But studies have shown that having a big cash reserve can lower the sustainable withdrawal rate.  For one, this strategy may backfire on you in prolonged bear markets because you'll end up withdrawing money to replenish the cash buffer at even lower prices. And with cash yields so low, anything you keep outside of your investment portfolio also won't be growing for you.

At the end of the day, holding a big cash reserve simply increases your bond allocation. For many, it also provides a huge psychological boost of confidence when markets take a dive, so there's still incredible value in this strategy. All I'm saying is to think about it before blindly deciding it's worth the cost.

3. Follow my strategy on mortgage payments because I'm right. There's going to be a debate on whether to prepay mortgages until the end of time, but there's no right answer for everybody. The math may point in favor of not prepaying the mortgage, but people often forget that reaping that mortgage interest is a risk-free maneuver, while you have to incur investment risks in order to try beating that interest rate. Others will mention the point on taking additional risk, but the risk may be so small that it's worth taking. Then, some people will see a higher investment balance and simply spend more, negating any financial benefit of taking that extra risk. Everyone is different and will react differently given the same situation. How will there ever be a right answer everyone needs to follow?

Rules of thumbs are great, but treat them as a friendly nudge in the right direction instead of the ultimate truth. Always think for yourself and consider whether following commonly accepted advice makes sense. Your future self will thank you for it.

Visit MoneyNing.com for more personal finance discussions. This site also helps readers decide whether a 0 percent balance transfer card is worth signing up for and keeps a list of helpful promotion codes.