Once you reach retirement age, you may think all the hard work is done. You've worked diligently for decades to save for your golden years, and now it's time to enjoy the fruits of your labor.
While retirement is a time to relax and unwind, that doesn't mean you can forget about carefully managing your money. In fact, it's arguably even more important to keep a close eye on your finances in retirement -- you're living on a fixed income, and even one mistake could lead to a financial disaster down the road.
To make sure your retirement is as enjoyable as possible, make sure you follow these three crucial retirement rules.
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1. Establish a withdrawal strategy
It may be tempting to splurge in your first few years of retirement and spend more than you should, but overspending now could result in going broke later. By creating a withdrawal strategy, you can ensure you're spending enough to live a comfortable retirement, but not so much that you risk running out of money later. Exactly what type of withdrawal strategy you should use, though, is up for debate.
One popular guideline is the 4% rule, which states that you can spend 4% of your total savings during the first year of retirement, then adjust your withdrawals each following year to account for inflation.
The 4% rule is a good benchmark to get a rough idea of how much you can safely withdraw, but it's not without its drawbacks. For example, it assumes you're going to be spending the same amount every year in retirement, when in reality approximately 80% of retirees experience significant spending shifts year to year, according to a study from J.P. Morgan. Especially as you age and healthcare issues become more prevalent, you may end up spending more per year during your later years than when you first retire.
Because withdrawal strategies can be complicated, it may be a good idea to talk to a financial professional before you retire to see how much you should be withdrawing each year. He or she can also help you account for shifts in the market (since that will affect how much you have in your retirement fund to spend), as well as how to handle large expenses like healthcare costs.
Regardless of whether you talk to a professional or go the DIY route, just make sure you have some sort of strategy in mind so that you don't wildly overspend each year.
2. Don't rely too heavily on Social Security
Social Security benefits can sometimes be used as a crutch, especially if your savings aren't quite up to par. In fact, nearly half of unmarried beneficiaries and one in five married couples say they depend on their monthly checks for at least 90% of their income, according to the Social Security Administration.
But depending too heavily on Social Security benefits can be dangerous for a couple of reasons. First, the average check is just $1,471 per month, so that's not a lot to live on and may not be enough to pay the bills. Second, there's a chance benefits could be reduced in the next couple of decades, making it even harder to survive if Social Security is your primary (or only) source of retirement income. If you're already retired and a cut in benefits makes it impossible to pay all your bills, you might have to return to work or find another source of income to make ends meet.
To avoid this scenario, make sure you have enough in savings to cover the majority of your expenses. Social Security benefits are only designed to replace approximately 40% of your pre-retirement income, meaning the other 60% will need to come from you.
If you're close to retiring and don't think you'll be able to save enough to cover the majority of your retirement costs, another option is to wait a few years to claim benefits. You can begin claiming benefits at age 62, but for every year you wait up until age 70, you'll receive 8% more with each check. While it's not recommended to lean on your checks for the majority of your income, if you have no other choice, this boost in benefits can make it a little easier to get by.
3. Adjust your retirement plan as needed
No matter how well-thought-out your retirement plan is, it's not set in stone. You'll come across obstacles along the way -- like expensive healthcare costs or a stock market downturn -- that will affect your plan. To ensure you'll be able to live the rest of your life comfortably, you'll need to be able to roll with the punches and make adjustments as you go.
If you overspend one year, for example, you might need to cut back the next year to make up for it. If the stock market takes a dip and it hurts your investments, you may need to spend conservatively for a while until your savings bounce back. Or if you notice early on that you can't afford to keep up your current lifestyle long-term, see if there are ways you can reduce your costs so your money lasts longer. The more flexible you are to adapt to changes, the easier it will be to enjoy a comfortable retirement.
Retirement can be one of the most enjoyable times of your life, or it can be one of the most stressful times of your life, depending on how you prepare for it. But by sticking to these retirement rules, you can give yourself the best shot at a successful retirement.
