After working hard all your life, you deserve to have financial security in retirement. And, the good news is, you can make that happen.
You'll obviously need to save money over the course of your career, though. And, when you get to retirement, you must continue to make smart choices about managing your money so you don't run short of cash toward the end of your life.
To help ensure you have the stable and secure retirement you deserve, it's really important to follow these three rules after you've left the workforce.
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1. Maintain a safe withdrawal rate
You cannot live on Social Security alone because these benefits are intended to replace only 40% of pre-retirement income. You'll need money in savings to help support yourself. And you don't want that money to run out.
That's why it's so important to maintain a safe withdrawal rate. That's the rate at which you take money out of your retirement accounts. If you take out too much too soon, you'll drain your account. You won't have enough still invested to earn the returns you need to keep it going.
There are a few ways to maintain a safe withdrawal rate.
- You can follow the 4% rule, which says you can withdraw 4% of your balance in the first year and then increase withdrawals to keep up with inflation. The effectiveness of this plan has come into question, though, as people have lived longer and projections for future returns have changed.
- You can use the Required Minimum Distribution tables from the IRS to help you make decisions about withdrawals. These tables tell you how much you must take out of traditional 401(k) and IRAs, but they can also be helpful no matter what kind of retirement plan you have.
- You can be very conservative and withdraw only returns, leaving your principal alone. But this approach won't work for you unless you have a lot of extra money invested.
Whichever option you pick, the important thing is to have a strategy that won't leave you high and dry.
2. Be smart about when you claim Social Security
While you can't live on Social Security alone, it will still be an important retirement income source. So if you want financial security as a senior, be smart about when you file for benefits.
You can file any time starting at age 62. However, for most people, the best age to get your first benefit check is 70. Waiting to claim benefits results in a higher monthly check, as well as more lifetime benefits if you outlive your life expectancy. If you were the higher earner in your marriage, your spouse will also get larger survivor benefits if you put off your claim.
To decide what's best for you, though, consider your health status as well as whether you need Social Security to help you maintain a safe withdrawal rate if you retire earlier than 70. The key is to know how your claiming age impacts your income, calculate your break-even point, and make an informed choice.
3. Make a plan to deal with healthcare costs
Finally, you need a plan to pay for medical care as a senior. Data from the Employee Benefit Research Institute finds retired couples with high prescription drug needs may require as much as $413,000 in savings to pay for out-of-pocket medical costs. Not having a plan for this could mean you end up broke very quickly.
Investing money in a health savings account throughout your working life is one option if you're eligible for one. An HSA is meant for covering medical expenses if you have a high-deductible plan, but you can invest the money for years and allow it to grow tax-free to use to cover medical care as a senior. You should also look into what type of Medigap or Medicare Advantage plan could be appropriate for you depending on your health needs.
By following these three rules, you can help to ensure you have the funds you need to provide yourself with the retirement you deserve.
