For most people, pensions are a thing of the past, so it’s up to most workers to provide their own financial futures, along with some help from Social Security which is meant to replace 40% of pre-retirement income. It goes to show, saving for retirement early and often is a critical undertaking for all Americans.
Here are seven retirement rules you should know — and act on during your lifetime — to enjoy a comfortable and secure retirement with no unpleasant surprises at the end of your life.
Rule No. 1: Have a plan — and follow it
You absolutely need a plan — otherwise you’re leaving things up to chance, which is never a good idea. Take the time to figure out how much money you’ll need to live on in retirement and how you’ll save it.
One rule of thumb is that you’ll need 80% of your pre-retirement income in retirement, but your should do your own calculations. You can also work backwards, using the 4% rule of thumb, which tells us you can safely withdraw 4% of your nest egg in your first year of retirement, and adjust upward for inflation thereafter. Many people wind up spending far more money in retirement than they did working, due to pricey retirement activities or unexpected health conditions, which don’t come cheap.
Try this simple online compounding calculator to jumpstart your planning. Start by putting in your expected investment growth rate for the interest rate, and try out different savings levels. For example, if you start with $10,000, you save $10,000 each year in a tax-advantaged retirement account, and you expect it to grow an average of 8% annually, over 20 years, you’ll end up with about $540,000. Try different scenarios that are realistic for you and keep track of a few estimates to create a range to shoot for. The 8% growth comes in when you invest your savings in the stock market wisely, combined with the power of compounding.
Remember that your money might need to last a long time if you’re lucky to live longer than average, so plan conservatively. If you retire at 62, for example, and then you live to 100, you’re retired for 38 years. Don’t assume that you’ll be able to retire exactly when you want to, either. According to the 2016 Retirement Confidence Survey, 46% of retirees left the workforce earlier than planned, with 55% citing health problems or a disability as the reason and 24% citing changes at work such as a downsizing or workplace closure.
Rule No. 2: Save aggressively and invest effectively.
There’s a good chance that you, like most Americans, are behind in your retirement savings. Of Americans aged 55 or older, 28% have less than $25,000 saved, according to the the 2018 Retirement Confidence Survey. Younger folks are in worse shape — more than half have less than $10,000 socked away — but fortunately, they have plenty of time to gain ground. As long as you have a few years before you retire, there’s still time to significantly improve your financial condition by your retire date.
Start by maxing out your IRA contribution each year (most of us can contribute $6,000 for 2019, and those aged 50 or older can contribute $7,000) — and try to max out your 401(k) contribution, too (with 2019 contribution limits of $19,000 for most folks and $25,000 for those 50 or older).
The below table shows how much a lump sum accumulates over various periods when your investments grow by an average of 8% annually. (The stock market has averaged annual gains of close to 10% over long periods, but over your specific period, it could be much less, or more.)
| Growing at 8% for | $10,000 invested annually | $15,000 invested annually | $20,000 invested annually |
|---|---|---|---|
| 5 years | $63,359 | $95,039 | $126,719 |
| 10 years | $156,455 | $234,682 | $312,910 |
| 15 years | $293,243 | $439,864 | $586,486 |
| 20 years | $494,229 | $741,344 | $988,458 |
| 25 years | $789,544 | $1.2 million | $1.6 million |
| 30 years | $1.2 million | $1.8 million | $2.4 million |
The 4% rule is flawed, but it is helpful in figuring out how well your savings will serve you in retirement. It suggests withdrawing 4% of your nest egg in your first year of retirement and then adjusting for inflation in subsequent years. Here’s how much income various-sized nest eggs will generate in year one:
| Nest Egg | 4% First-Year Withdrawal |
|---|---|
| $250,000 | $10,000 |
| $300,000 | $12,000 |
| $400,000 | $16,000 |
| $500,000 | $20,000 |
| $600,000 | $24,000 |
| $750,000 | $30,000 |
| $1 million | $40,000 |
How should you invest your dollars? For most people, it’s best to just stick with an inexpensive broad-market index fund like one tied to the S&P 500 index, that will deliver roughly the same returns of the overall stock market. Index funds have tended to outperform managed stock mutual funds over long periods, so don’t allow yourself to be enticed by a sweet-talking mutual fund pusher.
Rule No. 3: Tend to your physical and mental health
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Planning for retirement and living well in it might seem to be largely about money — saving enough, keeping it allocated properly, spending the right amount, and not running out of money. Those are indeed important considerations, but there are other important components of retirement — such as your health, both physical and mental.
Consider this: A 2014 MassMutual survey found that 10% of retirees were surprised to find themselves lonely, bored, with a lost sense of purpose, and/or depressed in retirement. So plan to stay active and social in retirement, too. Being physically active can keep your bones and heart strong, while being socially active keeps you mentally and physically healthier and could even keep dementia at bay. Think about getting a part-time job, a side hustle, joining a club, or taking up a new hobby. It’s not a bad idea to start looking into possibilities well before you retire.
Rule No. 4: Don’t forget healthcare costs
Speaking of health, don’t forget to factor healthcare costs into your planning. A65-year-old couple retiring in 2019 will spend, on average, a total of $285,000 out of pocket on healthcare, according to Fidelity, of course, that’s an average so you’ll probably spend more or less.
Rule No. 5: Remember your RMDs
If you have any money in traditional IRAs or 401(k)s, remember to take your required minimum distributions (RMDs) at the right time — when you reach age 70 1/2.
If you fail to take these annual withdrawals on time, you’ll face a heftypenalty — 50% of the sum you should have withdrawn as your RMD. These are annual deadlines, so set yourself a reminder on the calendar each year so you never forget.
Rule No. 6: Don’t cash out, and don’t exit completely from stocks
If you’re thinking that once you approach or enter retirement, you’ll need to sell all your stocks and buy bonds or just move that money into CDs, think again. Yes, it can make sense to keep a portion of your retirement war chest in a “safer” place than the stock market. But remember, for funds you won’t need for at least five or ten years, the stock market is one of the best ways to grow that money. If you have 20 or more years of retirement ahead of you, a big chunk of your nest egg can keep growing for more years before being moved. You might reduce your risk by favoring stable, established blue chip stocks, including dividend payers, instead of would-be highfliers.
Learn what a bond ladder is and be smart about aligning your portfolio allocation with your timeline. Meanwhile, don’t cash out retirement accounts early. That stops the money from growing more, and it can mean penalties and taxes, too. Many people cash out when they change jobs, a move that short-changes their financial future.
Rule No. 7: Be smart about Social Security
Finally, the last important retirement rule: Find out how much money you can expect to receive from Social Security and incorporate this monthly income source into your retirement planning.
First, visit to the Social Security website to set up a “my social Security” account. Here, you can view records of your past earnings and estimates of your future benefits. The average monthly Social Security retirement benefit was recently $1,467, or about $17,600 annually, while the maximum monthly benefit for those retiring at their full retirement age (FRA) in 2019 is $2,861 — $34,000 for the year. If those sums seem too small to sustain your retirement, remember that if your earnings are above average, you’ll collect bigger checks, and there are ways to increase your Social Security benefits, too.
The more you read up on retirement issues and the better you plan for your financial future, the more comfortable and low-stress your golden years are likely to be.