You’ve spent decades in the workforce earning a living, your schedule dictated by the demands of the job. All the while, you’ve been steadily adding to your savings so that one day you could get to this point. Retirement.
Now, there’s no alarm to wake you up in the mornings and no boss to answer to. You can finally get around to crossing items off your bucket list — or simply have the opportunity to catch a midweek matinee movie.
The world is your oyster.
But even though life feels more relaxed and carefree, that doesn’t mean you no longer have financial responsibilities. In fact, now’s the time you might need to be even more diligent when it comes to budgeting.
Living on What You Have Saved
When you say goodbye to your 9-to-5, you also say goodbye to your regular paycheck. You’ll rely on Social Security checks, the money in your retirement accounts and any additional income, like from a pension, to cover your expenses.
Sticking to a budget in retirement is vital so your savings last. That money you’ve squirreled away in your working years has to stretch for decades. Life on a fixed income means there are no bonuses, overtime or promotions to increase your cash flow.
How Much Should You Have Saved?
If you’re already retired or nearing retirement age, hopefully you’ve done the math to determine whether you’ll have enough money to keep you afloat.
One popular rule of thumb is to have 25 times your average annual expenses saved up. But how much money you need in retirement depends on many factors, like your age, where you live and the type of retirement you want to enjoy.
If you want to retire at 60, rent a highrise in New York City and travel every couple of months, you’ll need considerably more money than a retiree who leaves the workforce at 70, lives in a paid-off home in rural North Dakota and just stays home and knits.
There are also a lot of unknowns in retirement — like what medical conditions you could develop and exactly how many years you’ll need your money to stretch.
That’s why it’s important to have robust retirement savings and to be cognizant of your spending in your golden years.
How to Make the Most of Your Nest Egg
To make your savings last, you’ve got to be prudent about how much you withdraw each year.
“The gold standard has always been 4%, but new research has revealed a different number,” said Chuck Czajka, a certified estate planner and owner of Macro Money Concepts in Stuart, Florida.
He said withdrawing 3% a year instead gives you a 90% success rate to last through a 25-year retirement.
Keep in mind, once you’ve determined how much you can withdraw per year, you’ll want to divide that amount by 12 to come up with how much to withdraw each month. Czajka recommends withdrawing money from your retirement accounts on a monthly basis rather than taking out all you’d need for a whole year.
Meeting with a financial adviser can help you come up with a personalized plan to fit your individual situation.
“As people approach retirement, they should work with a retirement professional to determine their expected retirement income,” said Lisa Bamburg, a registered investment adviser and owner of Insurance Advantage in Jacksonville, Arkansas.
Factoring in Income Beyond Your Savings
In addition the money you’ve saved in your 401(k), individual retirement account (IRA) or other investment accounts, a portion of your retirement income will come from Social Security benefits.
You can start collecting Social Security benefits as early as age 62, but you’ll receive less money per month than if you waited until full retirement age — 66 or 67, depending on when you were born.
If you delay claiming Social Security benefits past your full retirement age, you’ll receive even more each month. However, there’s no additional increase once you’ve reached age 70.
In addition to Social Security, you might have other sources of retirement income, like money from a pension plan or an annuity.
A recent report from the National Institute on Retirement Security found that many retirees don’t have a great diversity in their retirement income, though more income sources provide for a more secure retirement.
The report found less than 7% of older Americans have retirement income that’s made up of a combination of Social Security, a pension plan and a retirement contribution plan like a 401(k). About 40% rely on Social Security alone.
“Social Security benefits typically are not the equivalent of what it takes for most people to maintain their standard of living,” Bamburg said.
The Social Security Administration states its retirement benefits only replace about 40% of earnings for people with average wages — more for low-income workers and less for those in higher income brackets.