5 Retirement Rules to Live By

If you're not thinking too much about retirement, you might want to start doing so, even if you're still in your 30s or 40s. After all, many of us will be spending 30 or more years of our life retired, so it's important that we plan for it effectively, lest we end up financially insecure.

Here are five key things you'll want to know about and take action on when it comes to preparing for retirement -- some of them soon and some later. If you start getting retirement-savvy now, your future self will thank you.

Image source: Getty Images.

No. 1: Have a plan

First off, you need a plan. Otherwise, you're just leaving your financial future to chance, hoping for the best. Here are some tips for getting started: 

• Take some time to read up on retirement topics, such as tax-advantaged retirement plans (such as 401(k)s and IRAs), taxes in retirement, and more.
• Estimate your future spending and financial needs and how much income you'll need in retirement.
• Figure out how you'll amass the money you'll need and how you'll set up your necessary income.
• Think about how you'll spend your time in retirement, lest you end up bored, restless, and unhappy. You might start planning some goals and thinking about hobbies or activities to engage in.

Even if you haven't saved much for retirement, all isn't lost. There's probably still time for you to significantly improve your future financial health. See how much can be amassed over different periods by socking away various sums regularly, with an annual average growth rate of 8%:

Source: Calculations by author.

Obviously, if you can sock away more each year, especially in earlier years, you can end up with even more. If it looks like you will end up far from your goal, think outside the box. You might be able to get more money in retirement by working part-time in your first years of retirement, or relocating to a less costly home or region, or considering options such as a reverse mortgage, or cashing out a life insurance policy. But for best results, aim to save aggressively and invest effectively.

No. 2: Make your money last

You'll need a plan to make your money last throughout retirement. You might apply the imperfect-but-still-helpful "4% rule," which suggests that you can withdraw 4% of your retirement nest egg in your first year of retirement and adjust future annual withdrawals for inflation, and have your money last for 30 years. So if you'd saved $600,000 by retirement, you could take out $24,000 in your first year.

The table below shows how much you'd get from nest eggs of various sizes if you withdrew 4%:

Source: Author calculations.

You would do well to consider dividend-paying stocks for your portfolio and annuities, as well. For example, if you have $500,000 spread out over a bunch of dividend payers with an overall average yield of 4%, you'd be set to collect $20,000 in dividends from that over a year. In tough times, dividends may be reduced or eliminated, but that's quite rare, and healthy companies tend to increase their payouts over time, which can help you fight inflation.

With fixed immediate annuities, you fork over a sum to an insurance company, and in return, you receive a set income for a certain period or even the rest of your life. A deferred annuity can be set up to start paying you in the future, and that can really help you not run out of money if it starts paying you at age 80, for example, when your nest egg has considerably shrunk.

Image source: Getty Images.

No. 3: Don't neglect your RMDs

This is a small but critical retirement rule to know: You must not be late taking your required minimum distributions (RMDs). Those are withdrawals that most folks are obliged to take beginning at age 72 from certain retirement accounts, such as traditional IRAs and 401(k)s.

The deadline each year for taking distributions is Dec. 31, except for the year in which you turn 72. For that year, you have until April 1 of the following year to take your RMD. (It's often wise to take it by the earlier Dec. 31, so that you don't end up with two chunks of income in one year that pushes you into a higher tax bracket.)

Here's why this is a big deal: If you fail to take your withdrawal on time, the penalty is very harsh -- 50% of the sum you failed to withdraw on time. (The IRS does let you appeal for a waiver, though.) To avoid problems, it's smart to set up your account so that your RMD is sent to you automatically each year.

No. 4: Be smart about healthcare

Next, be sure and factor healthcare costs into your retirement planning because it's likely to cost a lot. The folks at Fidelity estimate retirement healthcare costs each year, and their most recent numbers are that a 65-year-old couple retiring this year will spend an average of $285,000 on healthcare in retirement, and that doesn't even include Medicare or long-term care costs. Some other estimates are even more eye-popping: A 2019 HealthView Services report, for example, says that "A healthy 65-year-old couple living to 87 (male) and 89 (female) is expected to spend $606,337 on lifetime medical expenditures." That sum includes Medicare, supplemental insurance premiums, and out-of-pocket costs.

So what can you do, other than try to save a lot for your future? You can get savvy about Medicare, for starters -- and don't be late signing up for it, as that can result in a painful penalty. The usual enrollment period is the three months before the month in which you turn 65, that month itself, and the three months following it -- a seven-month window.

When you read up on Medicare, be sure to learn about Medicare Advantage plans, because some of them can serve you far better than traditional "original" Medicare. They're offered by insurance companies and by law are required to offer at least as much coverage as original medicare -- and they often go well beyond, including prescription drug coverage, dental coverage, and more. Medicare Advantage plans also cap your out-of-pocket expenses, something original Medicare doesn't do.

Consider saving money on healthcare via a Health Savings Account (HSA), too, or a Flexible Spending Account (FSA). They offer tax breaks while you pay for healthcare expenses, and HSAs incorporate a retirement savings feature.

No. 5: Determine when you should claim Social Security

Finally, get smart about Social Security, and make decisions that will maximize your benefits. You can make your benefit checks bigger or smaller depending on when you start collecting. Also, there are strategies for coordinating with your spouse as to when each of you starts collecting which can optimize your chances of getting the most out of the program.

There are many more things to know and think about regarding your retirement, and the more you know, the better and more comfortable your retirement is likely to be. Start with the five critical retirement rules above.