The early stages of retirement can be extremely exciting -- and probably a bit unsettling. After all, you're going from a full-time work schedule to suddenly having many free hours day after day, and that can be quite the adjustment.
But you'll also have to adjust financially to being retired. And for the smoothest transition possible, make sure to avoid these newbie mistakes.
1. Not following a budget
You might assume that you won't end up spending that much money in retirement and therefore don't need to track your bills. But actually, your senior living costs may end up being higher than expected. You might think you'll spend very little on transportation, for example, in the absence of having to commute to work, but if you wind up driving a lot to get out of the house, your fuel costs may end up being comparable to what you spent while you were working.
That's why you absolutely need a retirement budget. Figure out what your essential bills look like first, and then, compare those to what your income entails based on your Social Security benefits and the money you're able to pull out of your savings. That will help you determine how much you can afford to spend on leisure and other expenses so you don't go overboard.
2. Not establishing a savings withdrawal strategy
The last thing you want to do in retirement is deplete your nest egg prematurely. Doing so could result in a world of financial pain during the latter stages of your senior years, when you're less likely to be able to supplement your Social Security benefits with a job.
As such, don't just withdraw from your savings without putting any thought into it. Rather, come up with a strategy.
It used to be that a 4% annual withdrawal rate was considered acceptable for retirement savings, but if you expect to live a fairly long life, a rate of 2.5% or 3% may be a more suitable guideline to follow. You can also play around with different withdrawal rates to see what works for you, but the key is to establish a strategy rather than just randomly take money out of your retirement plan.
3. Choosing the wrong Medicare coverage
Once you retire, you may be eligible for Medicare. But if you're not careful, you could end up overpaying for healthcare and eating into your savings needlessly.
You have options when it comes to Medicare. You can stick to original Medicare and sign up for a Part D drug plan, or you can get an all-in-one plan with Medicare Advantage. There are pros and cons to either choice, so you'll need to do some research to see what's best for you.
But also, there are options you'll need to wade through within each choice. If you go with original Medicare, you'll have to select the Part D plan that best meets your needs without having to overpay for your premiums. Similarly, you may have a few dozen Medicare Advantage plans available where you live, and so selecting the right one will be crucial.
Now the good news is that you're allowed to change your Medicare coverage every year once you enroll, so if you wind up with the wrong plan, you won't be stuck with it for life. But it's still best to do a lot of research to avoid signing up for a plan that really doesn't meet your needs.
Start off on the right foot
Entering retirement means grappling with a whole new schedule, but also, a whole new set of financial decisions to make. Aim to avoid these beginner mistakes so you can enjoy your new stage of life to the fullest.