"The question isn't at what age I want to retire, it's at what income." -- George Foreman
Foreman's quip above is funny, but it's also very true -- both for wealthy people like him and for ordinary people. After all, even if you only have $500 in the bank, you could retire now, with extremely little income. And even if you're 65 with a million dollars, you could put off retiring in order to retire later with even more income.
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The main goal in retirement for most of us should be to be comfortable and happy. Here are some key retirement rules to keep in mind, as you pursue that goal.
1. Plan to stay mentally and physically active
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. (Fortunately, 72% of respondents reported feeling quite happy or extremely happy in retirement.) Don't let yourself end up unhappy in retirement. The routine of working is more important to some of us than we realize. Brace yourself for that and consider how you might deal with it -- maybe by getting a part-time job or taking up new hobbies. Be prepared to make some adjustments. Know that you'll probably need help in retirement, too, so expect that and perhaps practice asking for help now and then.
Plan to stay active and social in retirement, too. It's important to stay active for your physical health, as that can keep your bones and heart strong. It can also help you live longer and spend less on healthcare. Being social has been shown to pay big dividends, too, such as keeping you mentally and physically healthier and possibly even keeping dementia at bay.
2. Have a good financial plan
It's critical to not leave your retirement to chance. Many people just sock away what seems like a reasonable amount, without determining whether it's likely to be enough. Don't do that. Grab a pad and pen and perhaps a calculator. Figure out how much you need to save for retirement and how you will accumulate as much as you need.
This simple online calculator can help with your planning. It's meant to calculate interest, but you can swap in your expected investment growth rate for the interest rate, and then try out different savings levels. For example, if you start with $0, sock away $7,500 per year, and expect it to grow by 8% annually, on average, over 25 years, you'll end up with about $592,000. Try different scenarios that are realistic for you. Here are some possibilities:
3. Make your money last
Once you enter retirement, your nest egg (along with Social Security and any other income stream) will have to sustain you for the rest of your life. If you're retiring at 63 and end up living to age 93, it will need to last for 30 years.
How much of your nest egg should you withdraw each year? A helpful but imperfect rule of thumb is that withdrawing 4% of it in your first year of retirement and adjusting the annual withdrawal for inflation after that is very likely to make your money last about 30 years. But that rule isn't a guarantee and its usefulness depends on a variety of factors, such as market performance. Instead of following the rule closely, perhaps use it as a rough guide and withdraw more in years when the market surges, and less when it swoons. You could use 3.5% instead of 4% in order to be more conservative.
4. Don't forget healthcare
Be sure to factor healthcare costs into your plans. Fidelity Investments has estimated that a 65-year-old couple retiring today will spend, on average, a total of $275,000 out of pocket on healthcare during their retirement. (That's an average, of course -- you might spend less, or more.) Making smart Medicare-related moves can help.
5. Don't swear off stocks -- especially dividend payers
It's smart to think about shifting some assets from stocks to bonds or more stable securities as you approach and enter retirement. But remember that if you have 20 or more years of retirement ahead of you, you might do well to keep a big chunk of your money that you won't need for at least 10 years might in stocks, where it's likely to grow the fastest. You can aim to protect your capital by favoring stable, established blue chip stocks instead of would-be highfliers.
It's hard to beat generous dividend payers, especially companies that are still growing at a respectable clip, while increasing their payouts to shareholders regularly. Many offer dividend yields of 3%, 4%, 5%. Here are some familiar names and their recent yields:
If you have a $300,000 stock portfolio with an average dividend yield of 4%, it will kick out $12,000 to you each year. A dividend-focused exchange-traded fund (ETF) can serve you well, too, offering instant diversification. The iShares Select Dividend ETF (NYSEMKT: DVY), for example, recently yielded about 3.1%. Preferred stock is another way to go. The iShares U.S. Preferred Stock ETF (NYSEMKT: PFF) recently yielded 5.6%.
6. Consider an annuity
Another way to get retirement income is via an immediate annuity -- as opposed to a variable or indexed annuity (those can be problematic, with steep fees and restrictive terms). It's a lot like buying yourself a pension. Here's the kind of income that various people might be able to secure in the form of an immediate fixed annuity in the current economic environment:
Another strategy to avoid running out of money before you run out of breath is investing in a deferred annuity (sometimes called longevity insurance). It's a fixed annuity, but one that doesn't start paying immediately. Instead, the insurer agrees to start paying at a future point, such as when you turn a certain age. For example, a 70-year-old man might spend $50,000 for an annuity that will start paying him $800 per month for the rest of his life beginning at age 80.
7. Be smart about Social Security
Finally, do some strategic planning regarding Social Security. You can find out how much money you can expect to receive from it via a visit to the Social Security website. To give you a rough idea, the average Social Security retirement benefit was recently $1,370 per month, or about $16,400 per year, while the maximum benefit for those retiring at their full retirement age was recently $2,687 per month -- or about $32,000 for the whole year.
Know that you can increase or decrease your benefits by starting to collect Social Security earlier or later than your "full" retirement age, which is 66 or 67 for most of us these days. Read up on strategies to maximize your Social Security, especially by coordinating your actions with those of your spouse, if you're married. For example, the spouse with the lower expected benefits might start collecting early, so that the other spouse can delay starting to collect, making the ultimate benefits heftier.
Your future financial security might end up being even better than you expected it to be, if you keep the above rules in mind and make some strategic moves.
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