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4 Retirement Rules to Live By

Most people associate retirement with freedom, but it's not without limits. You're living on a fixed income with an uncertain future. A long life, an unexpected injury, or failure to plan appropriately could leave you struggling to get by. The risk is there to some extent no matter what you do, but you can minimize it by following these four cardinal rules of retirement finances.

1. Don't withdraw too much too quickly.

Unless you win the lottery, the money you have when you first retire is probably the most you'll ever have, and it has to last you a long time. Using it sparingly is paramount. There are several philosophies about how much you can safely withdraw each year in retirement. The best-known is the 4% rule. This says you can safely withdraw 4% of your retirement savings in the first year of retirement and then adjust this amount for inflation for every subsequent year. But it's still possible to run out of money with this approach, so some recommend using 3% instead.

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Another option is to use the IRS's Required Minimum Distribution (RMD) tables to determine your withdrawals. If you don't know what RMDs are, keep reading. The Center for Retirement Research (CRR) at Boston College has created its own recommended retirement withdrawal schedule, based on RMDs, whereby you withdraw less in the early years of your retirement (around 3.13% of your savings when you're 65). This percentage steadily rises as you age and can reach as high as 15.87% for those who live to be 100 or more.

This is problematic for retirees who hope to spend more in the early, more active years of their retirement. In that case, the CRR suggests spending the recommended percentages along with any income and dividends generated that year.

2. Remember your required minimum distributions.

The government lets you do what you'd like with your retirement savings between 59 1/2 and 70 1/2. But once you're past that window, the hammer drops. You must begin government-mandated minimum distributions from all of your retirement accounts except Roth IRAs. You figure out how much you need to withdraw by dividing your retirement account's balance by the distribution period listed next to your age in this table.

RMDs could potentially mess up your withdrawal schedule and raise your tax bill in retirement, but you can't avoid them because failure to take RMDs results in a 50% tax on the amount you should have withdrawn. The best thing you can do is be aware of them and plan accordingly. Remember, just because you have to take the money out of your retirement accounts doesn't mean you have to spend it all.

A possible way around RMDs is to keep working. The government allows you to delay RMDs past 70 1/2 as long as you're still working and don't own more than 5% of the company you work for. If you do this, you must begin RMDs the year you retire.

3. Choose the age you start Social Security strategically.

The most popular age to begin Social Security is also the earliest age you can claim -- 62. Starting this early may help you exit the workforce a little sooner, but it could also cost you tens or even hundreds of thousands of dollars over your lifetime.

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Your benefits are based on your average monthly income during your 35 highest-earning years with adjustments for inflation. They also depend on the age you begin taking them. You must wait until your full retirement age (FRA) to begin benefits if you want the full amount you're entitled to based on your work record. This is 66 or 67, depending on your birth year. If you start earlier, the Social Security Administration reduces your benefits. Those with a FRA of 66 who begin benefits at 62 will receive only 75% of their scheduled benefit, while those with a FRA of 67 who begin at 62 will receive only 70% of their scheduled benefit.

You can also delay Social Security past your FRA to increase your benefit. You reach your maximum benefit at 70 when you're entitled to 124% of your scheduled benefit if your FRA is 67, or 132% if your FRA is 66.

Delaying benefits is best if you can afford to do so and you anticipate a long life, but you may have to begin earlier if you need Social Security to cover your living expenses or if you don't expect you'll live very long.

4. Have a plan for healthcare.

When calculating retirement expenses, many people forget about healthcare, and some mistakenly believe that Medicare will cover all their healthcare expenses. But this isn't true. Medicare has its own deductibles, co-pays, and premiums, and there are some services it doesn't cover at all. You can pay these costs on your own or purchase a supplemental health insurance policy.

Health expenses in retirement are difficult to predict. You'll pay more if you have chronic illness or need to take many prescription medications, but even healthy people could be sidelined by an unexpected injury. The most optimistic estimates put retirement healthcare expenses around $285,000 for a 65-year-old couple retiring in 2019.

Add the cost of healthcare to your retirement plan, if you haven't already, and recalculate how much you need to save each month in order to hit your goal. If you're already in retirement and didn't make plans for healthcare, consider scaling back some of your other expenses, like travel, to free up more money for healthcare costs.

Everyone's retirement needs and challenges are different, so coming up with hard-and-fast rules is difficult. But the four tips listed above should apply to virtually every retiree. Review them and make any necessary changes to help your money last for years to come.

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