7 retirement rules to live by – The Fool Motley

For most people, retirement is a thing of the past. It is therefore up to most workers to provide their own financial future, as well as Social Security assistance to replace 40% of their income before retirement. This shows that early retirement savings is often a crucial business for all Americans.

Here are seven retirement rules that you must know – and take action during your life – to enjoy a comfortable and secure retirement without unpleasant surprises at the end of your life.

Rule # 1: Have a plan – and follow it

You absolutely need a plan – otherwise you leave things to chance, which is never a good idea. Take the time to determine how much money you will need to live in retirement and how you will save it.

A rule of thumb is that you will need 80% of your retirement income in retirement, but you should do your own calculations. You can also work backwards, using the 4% general rule, which tells us that you can safely withdraw 4% of your nest egg during your first year of retirement and adjust upward to account for the inflation. Many people end up spending a lot more money in retirement than they have spent at work, because of expensive retirement activities or unexpected health conditions, which do not not expensive.

Try this simple online composition calculator to start your planning. Start by showing the growth rate of your expected investment and try different levels of savings. For example, if you start with $ 10,000, you save $ 10,000 every year in a tax-advantaged retirement account and if you expect it to grow on average 8% per year over 20 years, you will end up with about $ 540,000. Try out different realistic scenarios for yourself and follow some estimates to create a shooting range. The 8% growth comes when you invest your savings in the stock market wisely, combined with the power of capitalization.

Do not forget that your money may need to last a long time if you have the chance to live longer than average. Plan carefully. If you retire at age 62, for example, and live 100 years, you've been retired for 38 years. Do not assume that you can retire exactly when you want. According to the 2016 Survey of Confidence in Retirement, 46% of retirees left the labor market earlier than expected, 55% citing health problems or disability and 24% of changes at work such as downsizing or the closure of the workplace.

Rule # 2: Save aggressively and invest effectively.

Like most Americans, there is a good chance your retirement savings will be late. According to the 2018 Retirement Confidence Survey, 28% of Americans aged 55 and over saved less than $ 25,000. The youngest are in poorer health – more than half have less than $ 10,000 – but fortunately, they have plenty of time to gain ground. As long as you have a few years to retire, you still have the time to significantly improve your financial situation by the time you retire.

Start by maximizing your contribution to the IRA each year (most of us can contribute $ 6,000 for 2019, and those aged 50 or over can contribute $ 7,000) – and also try to maximize your contribution 401 (k) (with a cap of $ 19,000 for most people and $ 25,000 for 50 and over).

The table below shows the cumulative amount of a lump sum over different periods when your investments increase on average by 8% per annum. (The stock market has averaged about 10% average annual earnings over long periods of time, but over a period of time it could be much lower or higher.)

Source: Calculations by author.

The 4% rule is flawed, but it helps to determine how well your savings will serve you well in retirement. He suggests taking 4% off your nest egg in your first year of retirement and then taking inflation into account in subsequent years. Here is how much income the eggs of different sizes will generate during the first year:

Source: Author's calculations.

How should you invest your dollars? For most people, it's best to stick to a broad inexpensive market index fund, like the one related to the S & P 500 index, which will produce roughly the same same returns as the entire stock market. Index funds have tended to outperform long-term equity mutual funds. Do not be seduced by a mutual fundraiser who speaks badly.

Rule # 3: Take care of your physical and mental health

Planning for retirement and living well may seem to be largely a question of money: save enough, allocate it properly, spend the right amount and not run out of money. These are certainly important considerations, but there are other important elements of retirement, such as your health, physical and mental.

Consider this: A 2014 MassMutual survey revealed that 10% of retirees were surprised to find themselves alone, bored, with a lack of motivation and / or depressed in retirement. Plan to stay active and social during your retirement. Being physically active can keep your bones and heart strong, while being socially active keeps you mentally and physically in better health and could even prevent dementia. Think about finding a part-time job, partying, joining a club or adopting a new hobby. It is not a bad idea to start studying the possibilities well before your retirement.

Rule # 4: Do not Forget Health Costs

Speaking of health, do not forget to consider the health costs in your planning. A 65-year-old who retires in 2019 will spend an average of $ 285,000 on health care. According to Fidelity, of course, it's an average, so you'll probably spend more or less.

Rule # 5: Remember your RMD

If you have money in traditional IRAs or 401 (k), remember to take your required minimum distributions (RMD) at the right time when you reach the age of 70 and a half.

If you do not take these annual withdrawals on time, you will face a heavy penalty – 50% of the amount you should have withdrawn as RMD. These are annual deadlines, so set yourself a reminder every year to never forget.

Rule # 6: Do not cash, and do not go out of stock completely

If you think that once you approach retirement or retire, you will have to sell all your shares and buy bonds or just transfer that money to CDs, think again. Yes, it may be wise to keep some of your retirement treasure in a "safer" place than the stock market. But remember, for funds that you would not need for at least five or ten years, the stock market is one of the best ways to grow that money. If you have 20 years or more of retirement in front of you, much of your nest egg can continue to grow for several years before being moved. You could reduce your risk by focusing on stable, well-established blue-chip stocks, including dividend payers, instead of potential investors.

Learn what a bond ladder is and be smart about aligning your portfolio breakdown with your calendar. In the meantime, do not cash out the retirement accounts in advance. This prevents the growth of money and can also result in penalties and taxes. Many people withdraw their money when they change jobs, which changes their financial future.

Rule # 7: Be smart about social security

Finally, the last important rule of retirement: determine how much money you can expect to receive from Social Security and integrate this source of monthly income into your retirement planning.

First, visit the Social Security website to create a "My Social Security" account. Here you can view records of your previous earnings and an estimate of your future benefits. The average monthly social security pension was recently US $ 1,467, or about US $ 17,600 a year. The maximum monthly benefit for retirees who reach retirement age in 2019 is $ 2,861 to $ 34,000 per year. If these amounts seem too modest for you to be able to retire, do not forget that if your income is above average, you will collect larger checks and you can also increase your social security benefits.

The more you know about retirement issues and the more you plan for your financial future, the more comfortable and stress free your golden years will be.