As a retiree, you'll have to make many decisions related to your spending and to different sources of income. These choices can affect how much money you have available, how far it goes, and how long it lasts.
You can't afford to make the wrong choices when your financial security is at stake, so be sure you think carefully about these four critical decisions that could make or break your retirement.
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1. Where you live
Your choice of state will affect the cost of living and how much money you have to spend on necessities. Choosing a more expensive area could lead to running short of funds -- unless you have a lot of money saved in a retirement plan.
Taxes can also be affected by your choice of state. Some places in the U.S. won't charge you income taxes at all. Others will tax some of your retirement income, but not Social Security benefits. And 13 states do take a cut of your Social Security retirement income.
It's not just your geographic location that matters, either. Choosing to live in a large home could increase your cost of living and necessitate a larger nest egg because of high property taxes and maintenance costs. On the other hand, opting for a small and inexpensive abode in a walkable area could be an especially affordable way to live, as you could benefit from saving on both housing and transportation costs.
2. When you claim Social Security
Social Security will probably be a crucial income source, and you'll need to be smart about when you claim benefits, as the age when you first file for them affects the amount of income you get.
See, you have a full retirement age (FRA) between 66 and 2 months and 67, depending on birth year. Retiring at exactly that age means you'll get your standard benefit that's based on earnings over your career. But early filing penalties apply if you claim before FRA that shrink your checks as much as 30%, and delayed filing credits apply if you claim after FRA that raise Social Security income by 8% per year until age 70.
Before deciding what age is the best time to claim benefits, be sure you know exactly how your decision affects the size of your checks.
3. What withdrawal rate you choose
Savings will likely be your other primary income source beyond Social Security. You'll need extra money beyond what your retirement benefits provide, and you'll want to make sure your nest egg lasts throughout your life.
The withdrawal rate you choose will determine how much income you get from your investments, as well as the likelihood of your nest egg running dry too soon. The withdrawal rate refers to the amount you take out of your account every year.
Traditionally, experts advised you could safely withdraw 4% of your nest egg in the first year of retirement and then adjust that amount by inflation each year and not risk running short of funds. However, this rule is considered by many to be outdated, since life spans and projected investment returns have changed, so you may wish to be more conservative and choose a lower rate.
4. What insurance coverage you buy
Finally, you need to make smart decisions about insurance. This means buying the right coverage before becoming Medicare eligible at 65 if you retire early. And it means researching exactly what Medicare does -- and doesn't -- cover and comparing options such as Medigap and Medicare Advantage to make sure you have the protection you need.
By taking steps to avoid huge out-of-pocket health expenses, picking the right place to live, and being smart about how you access your savings and Social Security benefits, you can hopefully end up with a comfortable retirement with plenty of financial security.
