The finish line is in sight. You're ready to finally leave the workforce behind to devote more time to what you enjoy. But quitting your job doesn't mean you can ignore your finances completely. If you want your money to last, you need a solid plan that takes your life expectancy and personal goals into account.
You don't want to find yourself several years into retirement with your nest egg gone, so it's a good idea to crunch the numbers one more time before you head off to your retirement party. Here are three things to check.
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1. Review your retirement finances
Make note of all your retirement account balances. Don't forget about old IRAs or 401(k)s with past employers. If you have a health savings account (HSA), you can use these funds for retirement as well. But you'll pay taxes on non-medical withdrawals, plus a 20% penalty for making non-medical withdrawals under 65.
Compare the total amount you have saved with your estimates of your retirement expenses to make sure you have enough to cover all your bills. If you haven't taken the time to calculate how much you need for retirement, now's the time to do so.
It's possible your goals or retirement timeline may have changed over time, affecting how much you need to save. Or you may not have been able to save as much as you wanted to over your working years. In this case, you may want to consider delaying retirement or working part time in retirement. It's not ideal, but if you don't take some steps to close the gap, you could run out of money too soon.
2. Develop a withdrawal strategy
In addition to knowing that you've saved enough, you also need to determine how much you can safely withdraw each year in order to make your savings last the rest of your life. There's always a bit of guesswork here since no one can be sure exactly how long they'll live, but it's best to err on the side of optimism. Planning for a long life will reduce your risk of outliving your savings.
There are many approaches you can take to decide how much you will withdraw each year. You may have heard of the 4% rule. This says in your first year of retirement, you can withdraw 4% of your total savings. Then, in subsequent years, you increase this amount slightly to account for inflation. In theory, this is supposed to help your retirement savings last at least 30 years, but it doesn't work for everyone.
Some fear it will cause them to run out of money prematurely, so they may opt for a 3% or 3.5% withdrawal rate instead. Others don't like how little the 4% rule allows them to spend in the early part of their retirement when they're more active and may want to travel or be more involved with hobbies. These individuals may prefer to develop a custom withdrawal strategy that enables them to spend more in those early years.
3. Know when you plan to claim Social Security
Social Security is a vital piece of the retirement puzzle for most seniors. If you're already claiming, you should make a note of how much you'll receive each month in 2023 so you can factor this in when calculating your retirement budget. The Social Security Administration should have sent you a notice giving your monthly benefit for next year after applying the 2023 cost-of-living adjustment (COLA). You can also find this information by checking your my Social Security account.
If you haven't claimed Social Security yet, now is the time to plan when you will. Remember, you aren't eligible to sign up until you turn 62, and unless you were born on the first or second of the month, you aren't technically eligible until the month after the month you turn 62. So if you were born March 15, 1961, for example, your first month of eligibility is April 2023. And you wouldn't actually get your check for that month until May because benefits are paid the month after they're due.
You don't have to sign up as soon as you become eligible, either. In fact, doing so could actually reduce your lifetime benefit because you're technically claiming early, and early claiming shrinks your checks. If you want to avoid this, you must delay benefits until your full retirement age (FRA). That's anywhere from 66 to 67, depending on your birth year.
You can also delay benefits past your FRA and your checks will continue to grow until you reach your maximum benefit at 70. This could get you a larger lifetime benefit if you live into your 80s or beyond. But those with shorter life expectancies or those who need help with their bills sooner may choose to sign up earlier.
There's a calculator in your my Social Security account that can show you how much you qualify for at every starting age between 62 and 70 to help you decide when you want to sign up. Choose a tentative age for the time being and use your estimated benefit to help you decide how much you need to withdraw from your retirement account each year to cover your expenses.
You may not feel like taking the time to do this, especially with the holidays around the corner. But it's important you review these steps before you actually retire. This will give you confidence you've done all you can to prepare for this next chapter of your life.
