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by Christy Bieber | Updated July 21, 2021 - First published on April 25, 2019
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Hoping to enjoy your golden years, rather than spend them worrying about going broke? Here's how you can set yourself up for success.Image source: Getty Images.
You’ve finally left the workforce and are ready to enjoy retirement. The only problem is, many retirees struggle financially -- so you may be worried about whether your nest egg will support you throughout retirement.
If you’ve got some money saved to supplement Social Security and your Social Security benefits are reasonable, hopefully you’ll be able to live well as a senior. But, if you want to succeed financially in retirement, there are a few key rules to live by. Here are three of them.
Living solely on Social Security is impossible for most retirees because benefits are designed to replace only around 40% of income. And, most retirees no longer get a guaranteed pension benefit from employers.
This means you’ll need to rely on your savings to support you. The problem is, it would be very difficult to save enough to live off of if you don’t invest your savings and earn reasonable returns.
Say you had $400,000 saved for retirement and needed to withdraw $2,500 worth of income monthly from your retirement savings. If you never increase the amount you withdraw, are in the 22% tax bracket, and earn 8% returns on your invested funds, your nest egg should last around 29 years. But, if you earn just 2% returns, you’d be out of money in 15 years. If you kept the cash in a checking account and earned no returns at all, it would be just over 13 years until you were broke.
Unless you’ve saved an absolute fortune, you need to invest your retirement nest egg in assets that earn at least reasonable returns. But, you also want to try to minimize your risk, especially when you’re drawing from your retirement account and may not have a ton of time to wait out downturns in the market.
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To build a portfolio of investments that appropriately balances risks versus returns, you need to know a little bit about how to invest. You’ll need to know how much of your portfolio to allocate to stocks -- one good rule of thumb is to subtract your age from 110 -- and how to build a diversified portfolio so if one investment performs poorly your others are likely to do OK.
Investing in ETFs is an easy way to build a diversified portfolio, but whatever approach you take, make sure you’re ready to manage your retirement money appropriately before leaving the workforce.
It’s imperative, as a senior, that you don’t spend too much money each year and draw down your retirement investment account too quickly. To ensure you’re not overspending, it’s important to live on a budget.
You should start by determining the amount of income you’ll have if you withdraw a reasonable amount of money from retirement accounts. The 4% rule is a good approach, and involves withdrawing 4% of your retirement account balance the first year of retirement and increasing your withdrawal rate each year to keep pace with inflation.
If you have a $400,000 nest egg and withdraw 4% of it in year one, you’d have an income of $16,000 from investments. Add on your Social Security benefits plus any other sources of income to find out how much you have to spend. Then, create a budget that meets your needs without exceeding the income available to you.
If you find that you need more income than you have coming from your investments, pensions, and Social Security, you may need to make some big lifestyle changes -- such as downsizing to a smaller home or moving to a lower tax state.
Finally, as a senior on a fixed income, you don’t want to go into debt. If you do, a good portion of your retirement money will go towards paying interest on what you owe.
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Ideally, you’ll have your mortgage paid off before retirement so your housing costs will be low. Try to avoid taking out car loans by saving up for new cars so you can pay in cash, and definitely avoid high-interest credit card debt. If you’re paying 13% or more in interest, this makes all your purchases more expensive, and thousands of dollars of your retirement nest egg could end up transferred to creditors instead of providing the financial security you deserve.
It’s imperative for retirees to be smart about their money, especially if they’re living on a fixed income. You don’t want to blow your savings early in retirement and be left with nothing when you need money later in life, so be sure to adopt these important financial habits ASAP after you’ve left the workforce. You’ll be glad you did when your nest egg lasts the rest of your life.
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