4 retirement rules to live by – The Fool Motley



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Most people associate retirement with freedom, but it's not limitless. You live on a fixed income with an uncertain future. A long life, an unexpected injury or the lack of proper planning can make it difficult for you to cope. Whatever you do, the risk exists, to a certain extent, but you can minimize it by following these four basic rules of retirement finances.

1. Do not remove too fast.

Unless you win the lottery, the money you have on your first retirement is probably the most money you will ever have, and it must last a long time. Use it sparingly is paramount. There are several philosophies about the amount that you can safely withdraw every year at retirement. The best known is the 4% rule. This means that you can safely withdraw 4% of your retirement savings in the first year of retirement, then adjust that amount to inflation for each subsequent year. But it's still possible to run out of money with this approach, so some people recommend using 3% instead.

Smiling senior couple

Source of the image: Getty Images.

Another option is to use the IRS Required Minimum Distribution Tables (RMDs) to determine your withdrawals. If you do not know what RMD is, keep reading. Boston College's Center for Retirement Research (CRR) has created its own retirement plan, based on the DMRs, that you withdraw less at the beginning of your retirement (about 3.13% of your savings at age 65). This percentage steadily increases as you get older and can reach 15.87% for those who live up to 100 years or older.

This is problematic for retirees hoping to spend more at the beginning of their more active retirement years. In this case, the CRR suggests spending the recommended percentages as well as the income and dividends generated this year.

2. Do not forget your required minimum distributions.

The government lets you do what you want with your retirement savings between 59 1/2 and 70 1/2. But once you have passed this window, the hammer falls. You must start the minimum distributions prescribed by the government from all your retirement accounts, with the exception of the Roth IRAs. You determine the amount you must withdraw by dividing the balance of your retirement account by the distribution period shown next to your age in this table.

RMDs can potentially ruin your withdrawal schedule and increase your tax bill in retirement, but you can not avoid them because not taking them will result in a 50% tax on the amount you should have withdrawn. The best thing to do is to know them and plan accordingly. Do not forget that it is not because you have to withdraw money from your retirement account that you have to spend everything.

One possible way around RMD is to continue working. The government allows you to defer more than 70 1/2 RMD if you still work and you do not own more than 5% of the company you work for. If you do this, you must start the DAM the year of your retirement.


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3. Choose the age at which you start social security strategically.

The most popular age to start Social security is also the earliest age you can claim – 62 years old. Starting early can help you leave the job market a little earlier, but it could also cost you tens if not hundreds of thousands of dollars in your lifetime. .

Your benefits are based on your average monthly income in your 35 highest earning years, adjusted for inflation. They also depend on the age at which you start taking them. You must wait until your retirement age (FRA) to start receiving benefits if you want the total amount to which you are entitled to be based on your work record. It's 66 or 67, depending on your year of birth. If you start earlier, the Social Security Administration reduces your benefits. Those with a 66-year-old FRA who start receiving benefits at age 62 will receive only 75% of the expected benefit, while those with a FRA of 67 and starting at age 62 will receive only 70% of the benefit. planned.

You can also delay Social Security beyond your FRA to increase your benefits. You reach your maximum benefits at age 70 when you are entitled to 124% of your scheduled benefit if your FRA is 67, or 132% if your FRA is 66.

It is best to delay benefits if you have the means to do so and if you are planning a long life, but you may need to start early if you need Social Security to cover your living expenses or if you do not think that you will live very long.

4. Have a plan for health care.

When calculating retirement expenses, many people forget about health care and some mistakenly think that Medicare will cover all their health care costs. But this is not true. Medicare has its own franchises, co-pays and premiums, and some services are not covered at all. You can pay these expenses yourself or take out additional health insurance.

Retirement health expenses are hard to predict. You will pay more if you have a chronic illness or if you have to take many prescription medications, but even healthy people can be put away by an unexpected injury. According to the most optimistic estimates, health care expenses for retirement would rise to about $ 285,000 for a 65-year-old who retires in 2019.

Add the cost of health care to your retirement plan, if it's already done, and recalculate the amount you need to save each month to reach your goal. If you are already retired and you have not planned health care, consider reducing some of your other expenses, such as travel, to free up more money to cover the costs of living. Health care.

As the needs and challenges of each retreat are different, it is difficult to define strict and fast rules. But the four tips listed above should apply to virtually all retirees. Examine them and make the necessary changes to make your money last longer.

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