Though many folks look forward to retirement and the chance to escape the daily grind of office life, the idea of giving up a steady paycheck is a worrisome prospect. In fact, running out of money is such a major retirement concern that 60% of older Americans claim they're more afraid of outliving their savings than of actually dying.
The good news, however, is that there are steps you can take today to make retirement less stressful. Here are a few important ones to start with.
1. Assess your savings
You might log on to access your retirement account balance and see a pretty substantial number on the screen. But what does that number actually mean? It's easy to look at a balance of, say, $500,000 and think, "Wow, that's a lot of cash." At the same time, you may be wondering whether that's enough savings to live on.
That's why it's crucial to understand what sort of retirement income stream your savings will actually produce and whether it's likely to be enough. As a general rule, if you begin by withdrawing 4% of your savings balance in your first year of retirement and then adjust subsequent withdrawals for inflation, there's a strong chance you won't have to worry about depleting your nest egg for a good 30 years. Therefore, if you're looking at $500,000 in savings and plan on withdrawing about 4% a year, that translates into $20,000 of annual retirement income.
Of course, that figure alone won't tell you how much income you have to look forward to in retirement. Ideally, you'll have other sources of income, like Social Security benefits and perhaps a part-time job, at your disposal as well. But knowing what sort of income stream your savings will provide can help you determine whether you've amassed enough to bring your career to a close.
Keep in mind, however, that unless you're housing your retirement savings in a Roth IRA or 401(k), you'll lose a portion of your withdrawals to taxes. Going back to our example, if you're looking at withdrawing $20,000 a year from a traditional retirement plan and your tax rate is 25%, that means you'll only have $15,000 a year to use in practice.
2. Create a budget
Following a budget is just as crucial during retirement as it is during your working years. In fact, you might even argue that it's more important during retirement, when you're on a fixed income with limited wiggle room.
The closer you get to retirement, the easier a time you'll have estimating your monthly living costs. But that doesn't mean you can't take an educated guess if you're younger, so examine your current spending and adjust it for things like inflation and lifestyle changes. For example, once you stop working, you're apt to spend more time at home, so your utility bills might climb. At the same time, if you currently commute to work and spend $300 a month on gas and tolls, you'll probably get some relief in that area once you no longer have a job to drive to.
Don't forget that there are two spending categories that are more likely than not to climb during retirement: healthcare and leisure. That's because aging tends to bring about medical issues, and not spending 40 hours a week or more at the office opens the door to more free time to occupy. But if you plan for these costs, you won't be caught off guard later on.
3. Read up on Social Security
The more strategic you are about Social Security, the more money you stand to collect from it in retirement, so if you're relatively clueless about that topic, take the time to get educated on how you can maximize your benefits. To get you started, one of the most important things you can do is know your full retirement age, because that's when you'll be eligible for your full monthly benefits. Though you're allowed to file for Social Security before reaching full retirement age, doing so will reduce the amount you get to collect each month.
Another thing you should know is that you're not required to claim benefits upon reaching full retirement age. If you hold off on filing past that point, you'll boost your benefits by 8% a year up until age 70, and that higher figure is what you'll then collect each month for the rest of your life.
These are only a couple of key points about Social Security, so make an effort to understand how the program works. You'll be thankful for it later.
Retirement can be a dream come true if you take steps to prepare for it the right way. Follow these tips, and with any luck, you'll enjoy your golden years to the fullest.