Here Are 6 Ways to Pay Yourself in Retirement, According to Suze Orman

When it comes to retirement, preparation is key.

Financial guru Suze Orman has some advice for anyone moving toward retirement. The point, Orman says, is to figure out how to convert savings into a reliable stream of income that will support you through a long retirement. Here are the six moves Orman suggests.

1) Know your expenses

You know how much you spend each month now. To accurately plan for retirement, you need to determine how much your monthly expenses are likely to be after you've left your job. Are there any expenses you can drop from your budget, like a monthly parking pass? Are there expenses that are likely to decrease, like your clothing budget?

To begin, sit down and write out all the bills you'll need to cover in retirement. This includes housing, utilities, food, Medicare premiums, health care, taxes, and any other expenses you'll still need to pay. Don't forget to add in extra for things like travel, lunches with friends, golf, or whatever it is you dream of doing.

2) Calculate your reliable income sources

Where will your retirement income come from? For example, you may have Social Security benefits, a pension, annuities, rental properties, a retirement account, or other source of income you know you can count on each month.

3) Pay your fixed living expenses from guaranteed income

There are three types of expenses: Fixed, variable, and one-time. Fixed expenses are those that occur each month. Once you've figured out what your fixed expenses are going to be, Orman suggests making sure you have enough guaranteed income to cover them.

Guaranteed income is money you know is due to you every month for the rest of your life. It includes things like Social Security, pensions, and annuities.

Here's the wisdom of Orman's advice: If you are able to cover your monthly expenses with guaranteed income, you won't have to worry about dipping into retirement savings to pay your bills. You'll still be able to draw from retirement savings, but those funds can be used for the things you want to do.

4) Keep two years of living expenses in cash

As Orman says, "You're retired. Your portfolio isn't." What she means is that using guaranteed income to pay your bills means allowing anything you've saved for retirement to continue to grow. Her advice to keep two years of living expenses in cash stems from that desire to let retirement funds grow.

Let's say another pandemic hits the year after you retire, or the U.S. goes into a recession and the value of your retirement investments drops. That's the worst time possible to take money from your investments. If you can leave your retirement funds where they are, they can be used to scoop up stocks and other assets at a bargain basement price. Then, once the stock market rebounds, your portfolio is worth even more.

Keeping two years of living expenses in cash means you'll have those funds to dip into rather than take them from retirement accounts.

5) Hatch an RMD plan

RMD stands for required minimum distributions. This is the minimum amount of money a retiree must withdraw annually from their tax advantaged retirement account once they reach the age of 72. (Fidelity describes a tax advantaged retirement account as one that allows you to save on a tax-deferred basis or with tax-free growth.)

Once you reach age 72, you'll need to make withdrawals. The withdrawals may be taken in a lump sum, monthly, or quarterly. The important thing to remember is to make the withdrawals before the annual deadline. Failure to do so leads to some intense penalties being levied by Uncle Sam.

The easiest way to figure out your RMD for the year is by using one of the many online RMD calculators, like this one offered by AARP.

Note: Although you will be hit with a stiff penalty if you don't withdraw at least the minimum, there is no limit to how much you can withdraw.

6) Plan to spend no more than 3% of your portfolio in the first year of retirement

Okay, you've finally retired and you're excited to do all the things you could not do while you were working. However, those things are going to cost money. Orman suggests not raiding your portfolio to live your dreams the first year of retirement. Rather, plan to take no more than 3%. For example, if your portfolio is worth $750,000, you'll take no more than $22,500.

Remember, if you take money from an account built with pre-tax funds, you'll need to pay taxes on the amount you withdraw.

Preparing for retirement is a lot like building a house one brick at a time. It can take years to finish, but the more work you put into it, the more it will keep you secure.