Pandemic-era restrictions and high unemployment have pushed many people’s retirement plans behind schedule. You may be wondering if “tried and true” approaches to retirement savings are still going to be able to provide a sustainable nest egg.
No matter what your current financial situation is or what your retirement goals are, there is no one correct way to handle your financial planning.
As we turn the corner on the COVID-19 pandemic, it’s an especially good time to reevaluate your assumptions about topics like claiming Social Security and investing during retirement, and to consider making a post-pandemic change.
Breaking away from the following retirement planning rules and instead making decisions that are right for you can set you up for a more comfortable and less stressful retirement.
Rule No. 1: Wait until age 70 to claim Social Security
Delaying claiming Social Security means a higher monthly benefit amount — every month, for the rest of your life. For that reason, many people are better off delaying claiming until as late as age 70 — but that doesn’t mean everyone is.
This may be particularly important to consider if you have health problems that may impact your life expectancy, for example.
For someone with a relatively short life expectancy, claiming early and thus receiving a lower Social Security benefit for a longer period of time could add up to more benefits over the course of their retirement than if they postponed claiming and received a higher amount over a shorter period.
For other situations in which people tend to be better off claiming early, check out “5 Times When It’s Smart to Claim Social Security Early.”
Rule No. 2: Follow the 4% rule
The 4% rule essentially says retirees should not withdraw more than 4% of their savings annually. It aims to provide a steady income through retirement without exhausting your savings. But it comes from a time when the average life expectancy was shorter and bonds offered better returns.
Living longer or earning lower returns on your investments than you expected means that following this rule could cause you to burn through your savings too fast. Recent research suggests 3.3% is a more safe figure these days, as we detail in “Are You Withdrawing Too Much From Retirement Accounts?”
The 4% rule has merit as a reminder that you generally must keep retirement withdrawals small to make your savings last. It also can help guide people who are trying to estimate how much money they will need for retirement. But the 4% rule is more of a rule of thumb than a hard-and-fast, one-size-fits-all rule.
How you withdraw savings in retirement should take other factors into account, such as your life expectancy, your investment returns and how different withdrawal options would affect your income taxes.
Rule No. 3: Ease up on stocks
Another rule to consider breaking is the suggestion that it is unwise to invest much of your savings in stocks as you get closer to retirement.
One investment method that follows this rule is subtracting your age from 100 to determine what share of your savings to put in stocks — which would mean, for example, that a 60-year-old would not put more than 40% of their savings in stocks.
There is not necessarily anything wrong with being fiscally conservative; however, if your investment returns can’t keep up with inflation — or if you end up living longer than you expected — then you may find yourself burning through your savings too quickly. That’s why it’s good to have some money in higher-return investments like stocks.
Exactly how much of your savings should be in stocks? You should base that decision not on a rule but on your situation, including your goals and your tolerance for the higher risk that comes with higher-reward investments like stocks. Money Talks News founder Stacy Johnson takes a deep dive into this in the episode of his Money podcast “Why Traditional Retirement Investing Is Broken.”
Rule No. 4: Medicare has you covered
This is more of a myth than a rule. Many people believe their health care costs will drop when they turn 65 and become covered by Medicare, the federal health insurance program for seniors and people with certain illnesses and disabilities.
But relying on Medicare to take care of your health during your retirement can be a recipe for financial ruin. Medicare is not free. As with any other type of health insurance, beneficiaries must pay ever-increasing premiums and deductibles as well as copays, coinsurance and other costs.
Medicare doesn’t cover all health care costs, either. For example, things like dental care, hearing aids and even long-term care are not covered by traditional Medicare, the government-managed program, which is the more common of two main types of Medicare (the other being Medicare Advantage plans from private insurers). And if you plan to travel during retirement, keep in mind that Medicare generally does not cover treatment abroad.
If you have yet to turn 65, it may be wise to add a health savings account (HSA) to your retirement portfolio, assuming you are eligible for one.
This type of tax-advantaged account, available to people who have high-deductible health insurance plans, essentially can be used like a retirement fund. In fact, it’s arguably one of the best types of “retirement accounts,” considering that it’s possible to pay no taxes whatsoever on money you put in an HSA, so long as you follow the IRS rules for these accounts.