So you’ve finally done it: You’ve reached retirement. Now’s the time to spend your days doing exactly what you like. Whether that’s sleeping in until 2 p.m., spending every day on a boat, or spoiling your grandkids, there are no rules for how you’ll spend your retirement — right?
Not so fast. While your days are yours to fill, there are definitely some financial rules you should live by if you don’t want to end up broke in your later years. Here are five of them you should be sure to follow:
1. Maximize your Social Security benefits
Social Security will likely make up a big portion of your retirement income, and experts at Stanford University’s Center on Longevity have referred to it as the ideal source of retirement funds, since it’s protected from inflation and continues until you die.
You’ll want to make sure you get the most benefits possible from Social Security. Those experts from Stanford analyzed 292 different scenarios for funding a retirement and found the best age to claim Social Security benefits is 70. Waiting until 70 can be smart because benefits increase 8% for each year you delay after full retirement age. You could get a 24% higher annual Social Security income if you retire at 70 instead of 67.
Of course, waiting doesn’t always make sense. You might decide to claim at 62 because you don’t think you’re going to live very long and may not receive your higher monthly Social Security income long enough to make up for missing out on years of benefits.
Or, you may need to claim ASAP because a lower-earning spouse needs to get benefits on your work record, which can’t happen if you haven’t filed for your own benefits yet.
The important thing is to determine exactly which Social Security claiming strategy makes sense for you. This guide to Social Security benefits can help.
2. Keep some of your savings invested
Retirement is a time to become much more conservative in your investments. After all, you need to withdraw money, so you can’t always wait out market downturns.
For most retirees, however, moving 100% of their money to safe investments such as bonds just doesn’t make sense because returns are too low and there’s a serious risk of running out of money too fast.
To make sure you’re taking the appropriate amount of risk, try subtracting your age from 100 or 110 to determine the percentage of assets you should have invested in stocks. If you’re 65, you’d have between 35% and 45% of your money invested, while you’d drop this down to 15% to 25% when you’re 85.
3. Have a smart plan for withdrawing from savings
Speaking of your invested funds, you’ll need to start withdrawing money to supplement Social Security. Unfortunately, figuring out how much money to take out is hard. You don’t want to withdraw too much and end up broke, but you also don’t want to live on a subsistence income while leaving more money invested than necessary.
There are a couple of smart ways to determine how much you should withdraw.
The safest approach is to live off the interest and leave the principal alone, but that’s too conservative for most retirees. Some experts also recommend using the 4% rule, which allows you to take out 4% of invested assets during your first year of retirement and increase withdrawals from this baseline number to keep pace with inflation.
Unfortunately, researchers found there’s about a 57% chance you’ll run out of money with the 4% rule, given the fact interest rates are below historic levels. The Center for Retirement Research recommended a modified approach using life expectancy tables prepared by the IRS to decide a safe withdrawal rate. This approach would have you withdraw about 3.13% of your retirement savings at 65 and gradually increase your withdrawals over time.
Whatever approach you choose, the important thing is to stick to it. Don’t start taking out tons of money when you have a good year in the market and you’re feeling flush, as you could have a bad year later and need those extra gains.
4. Never, ever forget your RMDs
When withdrawing from savings, there’s one rule you absolutely must follow. Never, ever take less than your required minimum distribution (RMD). RMDs are required for certain tax-advantaged retirement accounts, including 401(k)s and IRAs. You have to start taking them once you reach 70 1/2.
The amount you’re required to withdraw is based on your investment account balance and life expectancy. You can find out exactly how much you must withdrawal by using the tools and information in this article. If you fail to take RMDs, you’ll owe a penalty equal to 50% of the amount you were supposed to have withdrawn. Don’t let this happen.
5. Just say no to requests that compromise financial security
Demands on your finances don’t stop just because you’re not receiving regular paychecks from a job. You may have college-age kids who need help paying for school, adult children who need financial help getting started, or other relatives looking for assistance getting by.
While it’s good to be generous with your family (if you can afford it), it helps no one if you spend your retirement savings too quickly and end up broke yourself late in life, when it’s too late to go back to work.
Before you give money to others, make sure that your stability won’t be compromised. If your own future would be jeopardized, just say no. You may be able to find other ways to help, such as letting your kids live at home for a while.
It’s up to you to protect your retirement security
While Social Security helps you out financially as a senior, it’s not really enough to live on without supplemental income.
It’s up to you to make sure you have the money you need by maximizing your Social Security benefits and by building and protecting a nest egg. Start saving early and make smart choices during retirement to ensure you won’t run out of money, and that your retirement is as comfortable as possible.
