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These 3 Decisions Can Make or Break Your Retirement

By Christy Bieber - Dec 12, 2020 at 12:00PM

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Are you making the right choices?

Your financial situation as a retiree will have a major impact on whether you enjoy your later years or struggle through them. Fortunately, even if you're close to retirement, you can still make smart decisions to eliminate financial stress. 

In particular, there are three big choices that will have a profound impact on your finances for the rest of your life. 

Older couple looking at receipts with calculator.

Image source: Getty Images.

1. When you'll claim Social Security

You have a choice when to start getting retirement benefit checks, and it will affect your monthly income for the rest of your life. You can start claiming them as early as 62, but starting them so young means accepting a reduced benefit due to early filing penalties. The specific reduction depends on just how early you claim benefits, but if your full retirement age (FRA) is 66 and you begin your benefits at 62, you'll get 25% less money in your check every month than if you wait until FRA.

For most retirees, the optimal choice is to wait until after FRA. For each month you delay following your full retirement age, benefits go up. The increase amounts to an 8% annual bump for each year you delay until 70. 

If you decide to claim benefits early, you'll get more checks over your lifetime. But you may come to regret shrinking your benefits if your savings starts to run short late in life and you don't have a lot of Social Security income to rely on. On the other hand, if your health starts to suffer as you age and you can't enjoy your money as much, you may wish you had claimed benefits as early as possible. 

2. Where you'll live

Where you set up house as a retiree can profoundly affect your finances and broader quality of life. It'll determine the activities available to you, the healthcare services that are accessible, the social connections you can make, and your ability to remain independent due to the proximity of services. 

Since there are huge differences in costs of living and taxes from one state to another, your decision can also determine how far your money goes. If you live in an area with a high cost of living pre-retirement, it makes sense to seriously consider relocating once you'll be dependent on a fixed income -- unless your investments are large enough that it doesn't matter how much you spend. 

3. How much to withdraw from your retirement accounts

Your withdrawal rate determines two things: the amount of income available to you, and whether your savings will last for life. Obviously, the less money you take out of your account, the longer your funds will last. But withdrawing too little can leave you struggling, rather than enjoying retirement. 

First, be sure to make all of your required minimum distributions (RMDs). Beyond that, devise a strategy that minimizes the chances of draining your account balance but doesn't deprive you of the opportunity to enjoy the fruits of your labor.

The 4% rule was once a common approach. It involved taking out 4% of your savings your first year and adjusting the amount annually for inflation. It's no longer considered the best option since there's a very real chance it could leave you short of funds. As an alternative, the Center for Retirement Research at Boston College suggests using the RMD tables the IRS has created to guide you in your withdrawal choices. 

Being smart about when to claim your Social Security, where to live, and the withdrawals from your accounts maximizes the chances of a worry-free, enjoyable retirement. 

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