A rule is something you need to follow if you want to have a successful outcome. Finance rules are not laws or regulations, but they are important when you plan for retirement.
hink of them as part of a blueprint for financial security in your golden years.
In this article, we’ll discuss seven of the most important rules for retirement planning.
Rule #1: Know how much you need
The first rule of retirement planning is to know how much money you’ll need to sustain yourself after you retire. Begin this process by adding up all your current expenses.
Include rent or mortgage payments, utilities, fuel, food, and other costs that you deem to be “essential.” When done, add another 20% to that number so you have funds to enjoy retired life.
Rule #2: Review your budget
Knowing what you need will tell you if your current budget will get you there. Take some time and review your income and expenses, cut costs wherever possible, and ramp up your retirement savings.
If the numbers still don’t work, you may need to tighten the belt a bit more or find a second job or side hustle. It pays to work hard now so you can relax later in life.
Rule #3: Assess your insurance needs
Life insurance protects your loved ones if you die unexpectedly. Home and auto insurance protects the assets you’ve worked so hard to obtain.
Health insurance protects you. Assessing these needs should be part of the retirement planning process. You’ll have a limited income when you leave the workforce. Insurance can shield you from unexpected expenses.
Rule #4: Take advantage of tax deferred savings
Contributions to 401(k) plans and traditional IRAs are tax deferred. That can decrease your taxable income, putting you in a lower tax bracket.
The extra money from that can be additional savings or funds to pay off debt faster. Contribute the maximum if you can. In 2023, that’s $22,500 per year for a 401(k) and $6,500 for an IRA.
Rule #5: Curb your spending now
A common mistake that many people make is to wait until retirement to curb their spending. At that point, you have no choice. Limit spending on unessential items and services now.
You’ll find that you won’t miss those extras after you’ve gone without them for a while. Having extra money for savings and investments can be far more satisfying.
Rule #6: Pay off debt while you’re still working
No one wants to pay credit card bills or personal loan payments when they’re retired. Eliminate your unsecured debt as quickly as possible. One option is to take out a consolidation loan and pay it off before you retire.
You’ll also want to work on getting your home paid off. The security of home ownership is a comfort that can make your retirement years more enjoyable.
Rule #7: Retire at 70 if you can
Waiting until you’re 70 years old to retire will secure you a higher social security benefit payment and give you more time to build your retirement savings plans.
As of March 14, 2023, the age for required minimum distributions from a 401(k) or IRA is now 72 years old. Waiting as long as possible is beneficial to you because your retirement income will be higher.
The Bottom Line
The seven rules listed here are simple. Know how much you need to retire comfortably.
Review your budget to make sure you’ll hit that number. Address your insurance needs. Maximize tax deferred savings plans. Curb your spending. Pay off debt before you retire.
Wait until you’re 70 before you leave the workforce. This is a recipe for a successful retirement.