By: Linda Stern
Some financial advice is so oft-repeated that everyone takes it for granted: You shouldn’t bring debt into retirement. Debit cards are safer than credit cards. Older folks should invest more conservatively.
The problem is, a lot of that is bad advice. At best it fit a bygone era; at worst it was never right and is dangerous.
Here is a list of my least favorite financial chestnuts.
‘Don’t take a mortgage into retirement with you.’ That may have made sense when interest rates were high, but even after recent hikes mortgage rates are still close to their historic lows. Anyone who refinanced in recent years is probably paying less for that money than they will on any other loan they could get now or ever again in the future.
Instead of making extra payments to burn the mortgage early, stash those extra dollars in a retirement investment account. Invested prudently, it’s hard to believe that money wouldn’t earn you more than the 3 or 4 percent you’re paying in mortgage interest — which is tax deductible, don’t forget.
If you think you want to stay in your house through your dotage, paying off a low-rate mortgage slowly while you bank money is a much better solution than paying it off now and finding you need a costly reverse mortgage in the future.
‘Never borrow against your 401(k).’ When you borrow money from your 401(k), of course you lose the ability to invest it profitably until you pay it back. Furthermore, if you leave your job while you have a loan outstanding, you may have to pay the money back immediately or consider it as a taxable distribution.
But consider this: The going rate on 401(k) loans is prime plus 1 percentage point, or 4.25 percent right now. And you pay that back to yourself. If you have some of your 401(k) invested in low-yielding bonds or guaranteed instruments and you need to borrow money for an important reason — to see you through a medical problem, for example — and you know you’ll be able to keep up the payments, it may be a better deal than an unsecured loan or credit-card debt.
‘A debit card is safer than a credit card.’ If you have the discipline to charge only what you can afford to pay off, you can’t beat a credit card.
You’ll get incentives like cash rewards. If the number gets stolen, your issuer will make you whole. If you lose control of your debit card, your bank is probably going to make you whole, too, but your checking account could be a mess for a while. And you aren’t going to hit overdraft fees with a credit card.
‘Be practical about your college major.’ The latest thinking on college is that you shouldn’t spend a lot of money to get a degree in communications or social work.
Maybe that’s true. But don’t change your major to engineering if you really want to be a dancer or a kindergarten teacher. Some of the most successful business professionals studied philosophy or English.
Spend less by going to a less-expensive college, and follow your bliss.
Key Steps
When you retire, should you withdraw all of your money invested in stocks? That’s outdated thinking. Consider that the average 60-year-old is now told to prepare for a retirement that will last 25 or 30 years, so there is some time to invest for the long term.
With that long a time horizon, keep money invested in stocks, which, over time, still outperform other investments.
If you must borrow money for an important reason and you know you’ll be able to keep up the payments, it’s OK to take out a loan from your 401(k). The current rate on loans is prime plus 1 percentage point, or 4.25 percent, possibly a better deal than an unsecured loan or credit-card debt.
