Preparing for retirement is a daunting task, and many people have trouble even getting started with retirement planning. Even though there are many aspects to planning for retirement, you shouldn't let the magnitude of this important effort paralyze you into inaction.
The three retirement rules you'll find discussed here don't cover every aspect of your retirement planning, but they do introduce key concepts that can apply to several different commonly encountered situations. By keeping these rules in mind, you'll be in a better position to retire comfortably and feel secure in your golden years.
Rule 1: Put yourself first
One challenge many retirement savers have is figuring out how to balance the competing priorities for their money. In the heat of the moment, it can be difficult to find money to set aside for decades into the future when you have much more immediate needs for your available cash. Yet in many cases, you're better off leaving those short-term needs underfunded to achieve the longer-term goal of financial security in retirement.
One of the most common examples of this phenomenon comes with people who have children approaching college age. It's tempting to put your children's needs first by diverting money that would ordinarily go toward retirement savings and putting it instead in a 529 plan account or other educational savings vehicle. Yet even if doing so results in your children needing less financial aid -- a conclusion that's far from certain in all cases -- the odds are greater if you do so that you'll be turning back to your children for financial help later in your life. Putting yourself first might seem selfish, but if it makes the difference between independence and dependency when you retire, it's a price that many kids would be more than willing to pay.
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Rule 2: Don't give up on growth-oriented investments
Investors have been trained to see the approach of retirement as a signal to throttle back on the risk level in your portfolio. Admittedly, once you get close to the age at which you plan to hang up your work shoes, you won't have the luxury of being able to wait out long downturns in the stock market, and a compressed time frame can make stock investing much riskier. Yet for most retirees, life expectancies approaching 20 years emphasize the importance of not getting rid of all of your growth investments.
Rather than selling off all of your stock holdings as you near retirement, one approach involves scaling back slightly in order to raise cash to cover a few years' worth of expenses. That way, you can weather a market downturn without tapping your investment portfolio at exactly the worst time, but you can also feel confident that your remaining stock portfolio will provide some growth to ensure that you can stretch your retirement nest egg as far as possible. Finding the right balance is an individual decision, but in general, having at least some stock exposure is important in assuring your long-term success as a retirement investor.
Rule 3: Learn about the programs that will support you in retirement
Even with your efforts to save, government programs like Social Security and Medicare will provide huge financial support for those in or near retirement. It's therefore worth understanding what you can expect from these programs and what you can do to stretch your benefits even further. Social Security provides steady income that you'll never outlive, and decisions about when and how to claim your benefits can result in higher or lower monthly payments. Medicare benefits offer coverage for healthcare costs, and the various options you have in getting coverage can make a huge difference in what you eventually pay in total out of your pocket. These programs are stable, but they also require regular changes, and the potential for more extensive reform has been heating up in recent months. The more you know, the better you'll be able to take advantage of these programs to give you the support you need.
Retirement can be a tricky thing, but if you're prepared, you can do a better job of navigating complex issues and finding solutions that will work for your particular individual situation. If you put yourself first, stay focused on growth, and learn about Social Security and Medicare, you'll be a long way toward ensuring that your retired years will be prosperous.
