Many people look forward to retirement because it represents freedom. You don't have to get up and go to work every day or do what a boss tells you.
But just because your time is your own after you leave work doesn't mean you have no rules to live by in your later years. In fact, it may be even more important to adhere to some guidelines to make sure you don't run out of money when you're living on a fixed income as a retiree.
What are these guidelines? Here are five rules to consider to protect your financial security.
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1. Choose a safe withdrawal rate
Once you retire, it's time to start taking money out of your investment accounts. But you don't want to withdraw your cash too quickly or you could run out of money.
If you have $350,000 saved, withdraw $14,400 in your first year and increase your withdrawals by 2% annually, your money would last around 28 years, assuming you're in the 22% tax bracket and earn a 4% annual return. But if you withdrew $36,000 in your first year and kept all other parameters the same, you'd be out of money in just 10 years.
While experts traditionally advised you could withdraw 4% of your account balance in your first year of retirement and increase withdrawals by inflation, you stand a good chance of running out of money if you follow this outdated rule.
Instead, the Center for Retirement Research recommends changing your withdrawal rate based on your age and using tables from the IRS to guide you. The table below shows the amount you could safely take out each year if you follow this advice.
Source: Center for Retirement Research.
2. Keep some of your money invested
Changing your asset allocation is important once you've started living off your retirement accounts, because you can no longer afford to take as much risk. But you don't want to shift entirely to safe investments with low returns, or your money won't last.
Most experts recommend subtracting your age from 110 to determine a safe portion of your portfolio to invest in stocks. So if you're 70, you'd put 40% of your retirement funds into the market.
3. Don't claim Social Security without understanding how it works
Your savings is just one important source of retirement income. Social Security is another. Retirement benefits from the SSA provide at least half of household income for 50% of married senior couples and 70% of unmarried seniors.
Unfortunately, many people don't understand the effect their decisions will have on their benefits. If you claim them before your full retirement age -- between 66 and 67 depending on birth year -- early filing penalties reduce the standard benefit amount you're entitled to by as much as 30%. And claiming after FRA but before age 70 means losing delayed retirement credits that could raise your checks by 8% annually.
Sometimes, you'll decide claiming Social Security early makes sense despite the reduction in checks that will result. But you need to think carefully about the effect your age at filing will have on your lifetime benefits, so you can make an informed choice.
4. Know the RMD rules
If you have a traditional 401(k) or IRA, you're required to begin making withdrawals once you hit a certain age. If you turned 70 1/2 in 2019 or before, you're required to start taking them at 70. But if you hadn't hit this age yet, you have to begin making withdrawals once you turn 72.
These withdrawals are called required minimum distributions. The IRS has worksheets to help you figure out how much you have to take out of your account, as the amount varies by age and account balance.
5. Shop carefully for your Medicare plan
Healthcare costs aren't free in retirement, even once you're covered by Medicare. In fact, you're responsible for covering deductibles, premiums, and coinsurance costs.
This can get very expensive very quickly. Research has shown senior couples could spend hundreds of thousands of dollars paying out-of-pocket expenses even with Medicare coverage. You'll want to try to save for that while working, but also find ways to minimize costs after retiring.
Comparing different options, including Medicare Advantage plans and traditional Medicare with Medigap coverage, will be important to find a policy that keeps care as affordable as possible.
Be sure you follow these rules for a successful retirement
While following rules as a retiree isn't fun, it's even less enjoyable to find yourself with too little savings in your 70s or 80s.
By making sure you don't draw down your retirement account balances too quickly, maintaining a reasonable asset allocation, and keeping healthcare costs down, you'll hopefully have plenty of money to live on for the rest of your life.
