The retirement policies that your parents or grandparents may have had in mind while saving for their future may not serve you well. Times have changed, as have some thinking about how to prepare for retirement.
Some rules may not work for you, no matter how many people believe them.
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1. Retiring with a million dollars
This rule sure sounds like a lot of money — but it could be too little or too much for you. We are all different in how much we spend, how long we can live, and other factors. Inflation is also important. If you’re 35 and you’re aiming for a million dollars, it might have a purchasing power of $400,000 by the time you’re 65. So crunch some numbers to see what your goal is.
2. Save 10% of your income
This is another good, round number, but it depends a lot on how old you are, when you plan to retire, and how much you’ve already retired. Most of us need to save and invest 15% or 20% of our income, if we can — especially if we can. (Tax-advantaged retirement accounts like IRAs and 401(k)s can help here, and they have “catch-up” contributions allowed for ages 50 and older.)
3. Leave the workforce at age 65
Most people think about retiring at 65, and many retire before then. It’s great if you can do that, and some people end up retiring early, not because they want to. However, remember: You can live to 95 or more. If you retire at age 65, will your retirement income support you for 30 years?
4. Delay claiming Social Security regardless of your status
Various studies have found that most people will maximize all benefits by delaying claiming Social Security until age 70. But depending on your health and needs, starting earlier may make sense. Also, some worried about Social Security benefits drying up are considering starting earlier, too.
5. Use the 4% rule when withdrawing money when you retire
The flawed, but still helpful “4% rule” suggests that retirees can withdraw 4% from their nest egg in their first year of retirement, then adjust the following annual percentages for inflation. (There are other retirement options to consider, too.) It can help you think about your retirement plan, but it’s not right for everyone or all the time. If you’re starting to retire right after a big market crash, for example, it’s best to take as little out of your portfolio as possible.
6. Live only on profit
Interest rates are not always as low as they have been in recent years. In the 1980s, there were two interest rates available. Having a large nest egg and living without interest was possible for many. But with the average six-month CD recently at 1.5% and other similarly low interest rates, this is no longer a great strategy.
7. Save 100% minus your age in stock
It’s best not to sell out of all your stocks when you retire, because stocks tend to bring rapid growth. And after that, if your retirement is 30 years away, most of your money will stay invested for a very long time. But how much should you save in stocks? Another rule of thumb was to subtract your age from 100%. So if you were 65, you would save 35% of your career in stocks. Many experts today suggest starting with 110%, however, to give you the opportunity to get stocks for a long time. If you are a risk taker, you can go up to 120%. If you’re skittish, you’re probably 100% stuck.
8. Aim to retire with 10 times your salary
This is a somewhat unique number, because it is not clear what the — highest salary is? Your latest? Again, you may need more or less than this number. Instead of using a rule like this, carefully calculate how much you will need when you retire and how you will collect it.
9. Aim to have 80% of your retirement income
Likewise, don’t assume you’ll need 80% of your retirement income. You may need Again if you plan to travel a lot. Or you may need less cash, if you’ve just paid off your mortgage and don’t have expensive hobbies.
10. Leave your job and pay off your mortgage
This is a good goal to have, but not everyone can achieve it. However, try to pay off any high-interest debt before you retire.
11. Quit and quit working forever
Finally, don’t assume that you will retire and never work again. It can be powerful to work part-time in your first few years, allowing your nest egg to grow more while reducing your taxes. You might even be happy to keep a side gig you love for a long time — maybe tutoring, teaching music, or knitting and selling sweaters.
Each of us is different, with different circumstances, preferences, risk tolerance, health conditions, longevity, etc. So take the time to create your own solid retirement plan — and get it done.
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