Most people associate retirement with freedom, but it is not without limits. You live on a fixed income with an uncertain future. A long life, an unexpected injury, or a lack of proper planning can let you struggle to pass by. The risk is to some extent whatever you do, but you can minimize it by following these four cardinal rules for retirement finance.
1. Don't take too much too fast.
Unless you win the lottery, the money you have when you first retire is probably the most you ever have, and it must last a long time. Using it is sparse. There are several philosophies about how much you can safely withdraw each year in retirement. The best known is the 4% rule. This states that you can safely withdraw 4% of your pension savings in the first year of retirement and then adjust this amount for inflation for each subsequent year. But it is still possible to run out of money with this approach, so someone recommends spending 3% instead.
Another option is to use IRS's Required Minimum Distribution (RMD) tables to determine your withdrawals. If you don't know what RMD is, keep reading. The Center for Retirement Research (CRR) at Boston College has created its own recommended retirement plan, based on RMDs, where you deduct less in the early years of your pension (around 3.13% of your savings when you are 65). This percentage is steadily increasing as you get older and can reach as high as 15.87% for those who live to be 100 or more.
This is problematic for pensioners who hope to spend more in the early, more active years of the pension. In that case, CRR proposes to use the recommended percentages together with any income and dividends generated that year.
2. Remember your necessary minimum benefits.
The government lets you do whatever you want with the pension savings between 59 1/2 and 70 1/2. But when you are past this window, the hammer falls. You must start governmental minimum benefits from all your retirement accounts, except Roth IRA. You will find out how much you need to deduct by dividing the pension account balance into the distribution period listed next to your age in this table.
RMDs could potentially ruin your withdrawal schedule and increase your tax bill upon retirement, but you can't avoid them because failure to take RMDs results in a 50% tax on the amount you should have withdrawn. The best thing to do is to pay attention to them and plan accordingly. Remember, just because you have to take the money out of your pension doesn't mean you have to spend everything.
One possible way around RMDs is to continue working. The government allows you to delay RMDs over 70 1/2 as long as you are still working and do not own more than 5% of the company you work for. If you do this, you need to start the RMDs year you are retiring.
3. Choose the age at which you start Social Security strategically.
The most popular age to begin with social security is also the earliest age you can claim – 62. By starting this early, you can leave the labor a little earlier, but it can also cost you tens or even hundreds of thousands of dollars over your life.
Your benefits are based on your average monthly income in the 35 highest earning years with adjustments for inflation. They also depend on the age you begin to take. You have to wait until full retirement age (FRA) to start benefits if you want the full amount you are entitled to based on your job. This is 66 or 67, depending on the year of birth. If you start earlier, the social administration will reduce your benefits. Those with a FRA of 66 beginning to earn 62 will receive only 75% of their scheduled performance, while those with a FRA of 67 beginning at 62 will receive only 70% of their scheduled performance.
You can also delay social security past your FRA to increase your benefit. You get the maximum benefit of 70 when you are entitled to 124% of the planned benefit if the FRA is 67 or 132% if the FRA is 66.
Delaying benefits are best if you can afford to do so and you anticipate a long life, but you may need to start earlier if you need social security to cover your living expenses, or if you do not expect to live very long.
4. Have a health care plan.
When you count on retirement costs, many people forget about health care, and some believe wrong that Medicare will cover all their health rates. But this is not true. Medicare has its own deductions, co-payments and premiums, and there are some services that it does not cover at all. You can pay these costs alone or buy an additional health insurance.
Health expenses in retirement are difficult to predict. You pay more if you have chronic illness or need to take many prescription medications, but even healthy people can be sidelined by an unexpected injury. The most optimistic estimates provide retirement costs around $ 285,000 for a 65-year-old couple who retire in 2019.
Add to the cost of healthcare in your retirement plan, if you don't already have it, and convert how much you need to save every month to beat your goal. If you are already in retirement and do not have healthcare plans, consider reducing some of your other expenses, such as travel, to free up more money for health care costs.
All pension needs and challenges are different, so it comes up with quick and fast rules are difficult. But the four tips mentioned above should apply to almost all retirees. Review them and make the necessary changes to help your money in recent years.