You may end up having a few different income sources at your disposal in retirement, including a monthly benefit from Social Security and a nest egg you worked hard to build. In fact, ideally, the latter will be a larger income source for you than the former.
But even if you have a few different income streams and aren’t reliant on Social Security alone, it’s important to manage your money carefully during retirement. And following these rules will help you do just that.
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1. Stick to a preset withdrawal rate for your savings
You might retire with a few million dollars in your IRA or 401(k) plan and think, “Wow, I’m all set.” But not so fast. If you’re not careful, you could end up spending down your savings at a faster rate than anticipated. That’s why instead of taking withdrawals at random, it’s best to run some calculations (either alone or with the help of a financial advisor) and land on a withdrawal rate you’re comfortable with.
For years, financial experts said to use a 4% withdrawal rate as a baseline. Depending on your situation, that may be either too aggressive or too conservative. The rate you land on should hinge on factors like how long you expect to live and what other income sources you have at your disposal. But it’s important to come up with that rate before you start tapping your nest egg.
2. Know what taxes you’re on the hook for
A number of your retirement income streams may be taxable. Retirement plan withdrawals, for example, are subject to taxes unless you’re housing your savings in a Roth IRA or 401(k). And while you can use an HSA for any purpose without being penalized once you turn 65, nonmedical withdrawals will be subject to taxes.
You might also have to pay taxes on some of your Social Security benefits. Not only do some states tax benefits, but if your non-Social Security income is moderate, there’s a good chance your benefits will be subject to federal taxes. Be mindful of your IRS liability so you can plan around it.
3. Follow a budget
When you’re on a fixed retirement income, you can’t just spend money at random. Instead, you should have a budget you follow regularly to ensure that you’re not going overboard.
To be clear, that budget can include fun things like travel and entertainment — you don’t have to limit yourself to essential expenses only. The key, however, is to track your spending, know where your money is going all the time, and avoid exceeding your monthly allocations so you’re not forced to take extra retirement plan withdrawals.
Whether money is tight or abundant during retirement, it’s important to be in control of your finances. If you establish a withdrawal rate for your nest egg early on, understand your tax liability, and stick to a budget, you’ll put yourself in a great position to stretch your income, avoid financial stress, and enjoy your senior years to the absolute fullest.
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