7 retirement rules to live by

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Retirement Rules Are Changing

There are retirements that just happen and that can be good or rather difficult. Then there are retirements that you have carefully made decisions about. These stand a much greater chance of being comfortable and enjoyable. When it comes to the critical matter of planning for your future, here are seven retirement rules to live by.

Have a plan

The most important thing to do is to have a good plan, and to execute it. Grab a pad and pen and perhaps a calculator. Are your savings on track? How big does your nest egg need to be and will it reach that size on schedule? How will you accumulate as much as you need to?

This simple online calculator can help with your planning. It's meant to calculate interest, but you can swap in your expected investment growth rate for the interest rate, and then try out different savings levels. For example, if you start with $0, sock away $7,500 per year, and expect it to grow by 8% annually, on average, over 25 years, you'll end up with about $592,000. Try different scenarios that are realistic for you.

You might want to consider an immediate annuity (as opposed to a variable or indexed annuity) as part of your plan, to provide relatively guaranteed income. Dividend-paying stocks can be another great source of income. A portfolio with $250,000 in dividend payers with an average yield of 4% will generate $10,000 per year. That sum is likely to rise over time, too, as the underlying companies increase their payouts.

Make your money last

Once you enter retirement, your nest egg (along with Social Security and any other income stream) will have to sustain you for the rest of your life. How much of it will you withdraw each year? A general rule of thumb is that withdrawing 4% of it in your first year of retirement and then adjusting the annual withdrawal for inflation after that is very likely to make your money last about 30 years, if it's split between stocks and bonds. But that rule isn't a guarantee and its usefulness depends on a variety of factors, such as market performance. Instead of following the rule closely, perhaps use it as a rough guide and withdraw more in years when the market surges and less when it swoons. Perhaps use 3.5% instead of 4% to be more conservative -- after all, your retirement might be longer than 30 years!

Another tactic to avoid running out of money before you run out of breath is investing in a deferred annuity (sometimes called longevity insurance). It's a fixed annuity, but one that doesn't start paying immediately. Instead, the insurer agrees to start paying at a future point, such as when you turn a certain age. For example, a 70-year-old man might spend $50,000 for an annuity that will start paying him $1,600 per month for the rest of his life beginning at age 85.

Prepare mentally and physically

Don't let psychological aspects of retirement catch you off-guard. In retirement, many people find themselves bored, restless, or lonely. The routine of working is more important to some of us than we realize. Brace yourself for that and consider how you might deal with it -- maybe by getting a part-time job or taking up new hobbies. Be prepared to make some adjustments. Know that you'll probably need help in retirement, too, so expect that and perhaps practice asking for help now and then.

Plan to stay active and social in retirement, too. It's important to stay active for your physical health, as that can keep your bones and heart strong. Being social has been shown to pay big dividends, too, such as keeping you mentally and physically healthier and possibly keeping dementia at bay.

Be smart about Social Security

Find out how much money you can expect to receive from Social Security -- a visit to the Social Security website at www.ssa.gov can help with that. To give you a rough idea, the average Social Security retirement benefit was recently $1,344 per month, or about $16,000 per year, while the maximum benefit for those retiring at their full retirement age was recently $2,639 per month -- or about $32,000 for the whole year.

Know that you can increase or decrease your benefits by starting to collect Social Security earlier or later than your "full" retirement age, which is 66 or 67 for most of us these days. Read up on strategies to maximize your benefits, especially by coordinating your actions with those of your spouse, if you're married. For example, the spouse with the lower expected benefits might start collecting early, so that the other spouse can delay starting to collect, making the ultimate benefits heftier.

Don't forget healthcare

Be sure to factor healthcare costs into your plans. Per Fidelity Investments, a 65-year-old couple retiring today will spend, on average, a total of $245,000 out of pocket on healthcare. (That's an average, of course -- meaning you might spend less, or more.)

Don't swear off stocks

It's smart to think about shifting some assets from stocks to bonds or more stable securities as you approach and enter retirement. But remember that if you have 20 or more years of retirement ahead of you, a big chunk of your money that you won't need for at least 10 years might remain in stocks, where it's likely to grow the fastest. You can aim to protect your capital by favoring stable, established blue chip stocks instead of would-be highfliers.

Have a margin of error

Be sure to think about worst-case scenarios as you plan, too.

You may be figuring on a 20-year or 25-year retirement, perhaps from age 65 to 85 or 90. But lots of Americans are living well beyond that, sometimes even to 100 and beyond. Be sure to consider the possibility that your retirement might last for 35 years or more -- especially if you retire early. That's a long time.

Plan for expected expenses, too, such as moving costs if you decide to relocate or costly repairs to your car or home.

If you're feeling nervous or under-confident as you plan for a terrific retirement, consider consulting a financial advisor to help you get all your ducks in a row. Ones designated as fee-only won't be looking to earn commissions from selling you products.

The more you think about and plan for your retirement, the better it's likely to be. And since it can be 20 or 30 years of your life or more, it's well worth it.

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