10 Retirement Investing Rules You Should Know by Heart -- at Any Age

This article was updated on May 10, 2017. It was originally published on Dec. 16, 2016. 

"Whether you are just entering the workforce or nearing retirement age, planning for the future is critical."
--Ron Lewis

Just about all of us are either looking forward to retirement or already in it. After all, retirement is a time when we hope to finally be able to do lots of things we haven't gotten around to yet, such as tackling piles of books, learning to fly a plane, or just traveling extensively. No matter whether you're retired or not, you can significantly improve your financial future by keeping these 10 important retirement investing rules in mind.

Image source: Getty Images.

Image source: Getty Images.

Have a plan

The most important retirement-related rule is probably this: Have a plan. You're unlikely to accumulate as much money as you need and withdraw it according to plan if you have no idea how much money you need and no plan for withdrawals. Take some time to crunch numbers and come up with a road map. Be conservative, leaving room for bad luck, extended economic downturns, and the chance that you might live a very long time, requiring a bigger nest egg. Be sure to include healthcare expenses in your model, as they can be significant. Per Fidelity Investments, a 65-year-old couple retiring today will spend, on average, a total of $260,000 out of pocket on healthcare. (That's an average, of course -- meaning you might spend less, or more.) And factor in inflation, too -- which has averaged about 3% annually over many decades. You need your investments to grow faster than inflation to increase your future purchasing power.

Start saving early and aggressively

The sooner you start socking money away for retirement, the more time each dollar will have to grow. Starting early can boost your chances of being able to retire early, too. Be sure to invest effectively, too, balancing risk and reward. You can lose money taking on too much risk (lottery tickets, overpriced speculative stocks), but you won't gain much ground being too risk-averse, either (such as by sticking to money market accounts and CDs). Here's how much money you can accumulate if you invest various sums each year and earn an average annual return of 8%:

Calculations by author.

Take advantage of tax-advantaged accounts

A particularly effective way to invest for retirement is via tax-advantaged accounts such as IRAs and 401(k)s. There are two main kinds of each -- traditional and Roth.

With a traditional IRA or 401(k), you contribute pre-tax money, reducing your taxable income for the year, and thereby reducing your taxes, too. Taxable income of $70,000 and a $10,000 contribution? Boom -- your taxable income for the year is now $60,000. The money grows in your account and is taxed at your ordinary income tax rate when you withdraw it in retirement.

With a Roth IRA or 401(k), you contribute post-tax money that doesn't reduce your taxable income at all in the contribution year. Taxable income of $70,000 and a $10,000 contribution? Your taxable income remains $70,000 for the year. What's the point of the Roth, then? This: Your money grows in the account until you withdraw it in retirement -- tax free.

Contribution limits for 2017 are $5,500 for IRAs and $18,000 for 401(k)s. If you're 50 or older, you can sock away an additional $1,000 in your IRA and another $6,000 in your 401(k).

Image source: Getty Images.

Don't bail out of stocks

Many people imagine that once they hit retirement, they should no longer be invested in stocks, because... well... stock markets occasionally crash. It's true that the stock market can be volatile, but it's still one of the best long-term wealth builders. So as you approach and enter retirement, go ahead and shift some assets into bonds if you'd like, but consider keeping a meaningful portion of your nest egg still in stocks. After all, 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. Keep money you might need to tap in the next five to 10 years in safer places, such as bonds or money market accounts.

Image source: Getty Images.

Favor dividends

With your stock investments, give strong consideration to dividend-paying stocks, as they can be a great source of income. A portfolio with $300,000 in healthy and growing dividend payers with an average yield of 4% will generate $12,000 per year. That sum is likely to rise over time, too, as the underlying companies increase their payouts. You're not settling when you opt for dividend payers, either. Researchers Eugene Fama and Kenneth French, studying data from 1927 to 2014, found that dividend payers outperformed non-payers, averaging 10.4% annual growth versus 8.5%. Here's what a difference that is -- in a table showing how an annual $10,000 investment would grow:

Calculations by author.

Consider annuities

A great way to take pressure off yourself, financially, in retirement, is to buy annuities. If you build an annuity or two into your retirement portfolio, you can receive dependable income without having to keep track of any investments. Focus on fixed immediate annuities, not variable or indexed ones, as they can be more problematic, with high fees and restrictive terms. A fixed annuity offers a fixed income (possibly increasing with inflation, if you pay for that feature) that can start arriving immediately or in the future. As an example, with a $200,000 investment, a 70-year-old couple might be able to collect about $1,050 per month in fixed annuity income for as long as at least one of them is alive. A 65-year-old man could spend $100,000 today for a deferred annuity that pays him about $1,200 per month beginning at age 75. Deferred annuities, that start paying you in the future, cost less and can help you not run out of money as you burn through your nest egg in retirement.

Fees can quietly hurt your returns. Image source: Getty Images.

Pay attention to fees

Whether you're buying shares of companies through a brokerage or investing in mutual funds on your own or through a retirement account, pay attention to the fees you're paying. Consider this example: Imagine mutual funds A and B, which respectively sport expense ratios (annual fees) of 0.7% and 1.7%. Now imagine that you invest $5,000 in each of them annually for 20 years. If they each grow at an annual average rate of 10%, you'll end up with $289,000 in fund A but only $256,000 in fund B. That single percentage point cost you $33,000. Small differences in fees can result in big differences in long-term results.

Be smart about Social Security

For most of us, Social Security will provide a significant portion of our retirement income. It's smart to find out how much you can expect -- 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 $1,365 per month, or about $16,000 per year, while the maximum benefit for those retiring at their full retirement age was recently $2,687 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.

Image source: Getty Images.

Keep learning

If you keep reading up on retirement topics, you'll likely make savvier decisions over time that improve your life in retirement. There are gobs of helpful books at your local library, bookstore, or online, and plenty of articles like this one, too. You might, for example, study up on how to best allocate your assets as you approach retirement, how to choose good annuities, and whether you need a trust as part of your estate plan.

Consider hiring a pro

Retirement planning can be daunting and a non-exciting task to approach. If you're feeling nervous or under-confident about it, 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, and you can look for one at www.napfa.org. Yes, you may pay several hundred dollars or more, but the pro may save you much more than that.