USAA: Seven Money Rules to Break

A few weeks ago USAA article posted an article on when to break the “money rules”. Here’s the summary, with my comments in italics:

1. Pay off debt and build an emergency fund before saving for retirement …
… except when your debt is of the low-rate, tax-reducing variety, such as a mortgage or student loans, and your retirement plan at work offers an employer match for your contributions.

(And if you’re on active duty then the emergency fund can be as small as a month or two of pay. You have a steady paycheck and your command could let you tap advance pay in unusual circumstances.)

2. Save 10% of your income …
… except when you’re getting a late start.

(Then save a lot more. Compound interest is only magical if you get an early start. )

3. Always max out your employer-sponsored account …
… except when you may be able to create a better tax-management plan.

(Of course if you’re on active duty or in federal civil service then you’re going to max out the Thrift Savings Plan. But sometimes regular 401(k) fund expenses are so high that, once you’ve maxed the employer’s 401(k) match, it makes more sense to move on to a Roth IRA or your taxable accounts.)

4. Send your kid to college — it’s a great investment …
… except when it places an extreme burden on your finances.

(More on the hot college topic at this post. )

5. Buy a house if it costs 2.5 times your annual income or less …
… except when it doesn’t suit your circumstances.

(If you’re on active duty then you’re probably transferring too often to buy a house. Even if you plan to stay in an area for a number of years, your market might be soft for many months to come. Don’t rush into a “bargain” if prices are still dropping.)

(The “2.5 x annual income” thumbrule isn’t very helpful either, if you expect your income to rise over the years or if you’re leaving the military soon. Another rule of thumb is to limit your mortgage debt payment to roughly 28% of your take-home pay. A third rule of thumb is to limit your “non-discretionary” expenses– including mortgage payments, insurance, and all other debt– to no more than half of your take-home pay. The best rule of all, however, is to buy real estate only when your long-term prospects make it cheaper than renting.)

6. An annuity might not be right for you …
… except when it fits into your plan.

(If you’re retired military then you probably don’t need more annuities. Your military pension is the best annuity that money can buy. Even if you don’t have a military pension, you can purchase a very affordable annuity through the Thrift Savings Plan. )

7. When you retire, consider a withdrawal of 4% of your portfolio, then adjust every year for inflation …
… except when the timing isn’t right.

(The 4% website calculators don’t do a good job of handling variable withdrawal rates. Almost all failures of the 4% withdrawal scheme occur when the portfolio suffers severe losses during the first few years of retirement. However, humans tend to tighten their spending when the market goes down, and you can do this whenever you’re not comfortable spending your yearly amount. Another option is Bob Clyatt’s variable withdrawal plan of 4%/95%. When you reduce your withdrawals during down years, your portfolio will be able to recover that much more quickly from a bear market.)

What other “money rules” do you break when it makes sense?