4 Retirement Rules to Live By

Though many working folks look forward to retirement, it can be a challenging adjustment, both from a social and financial perspective. Here are a few important rules to follow that will help you make the most of your golden years.

1. Assume your spending won't go down

Many people expect their spending to plunge substantially once they stop working. But in reality, the bulk of your expenses are likely to stay the same in retirement, and some might even go up.

Think about the things you spend money on today, like housing, food, electricity, and cable. You'll still need or want those things when you're older and don't have a job to report to, and there's no reason to expect that they'll cost less. (Unless, of course, you're still paying a mortgage but expect to be home loan-free by retirement. In that case, your housing costs might drop, though your absent mortgage payment might be offset by rising property taxes and an increased need for maintenance and repairs.)

Then there's healthcare and leisure to consider. The former expense is likely to climb in retirement because as we age, we tend to encounter a greater number of medical issues. Similarly, because retirement means having more free time on your hands, it stands to reason that you might spend more to keep yourself entertained.

It's for this reason that most people are told they'll need about 80% of their former earnings to pay the bills in retirement, as opposed to, say, 50%. That 20% decrease in spending might account for things like lower transportation costs (since you'll be kicking your commute) and not needing to fund an IRA or 401(k). But make no mistake about it: The bulk of your bills will likely hold steady once your career ends.

2. Plan on getting roughly half of your income from Social Security -- but not more

Millions of seniors rely on Social Security to pay the bills in retirement, and while it's a good idea to factor those benefits into your retirement budget, you shouldn't expect them to constitute the bulk of your income. Or, to put it another way, Social Security isn't designed to sustain retirees by itself. If you were an average earner, it'll replace about 40% of your previous income -- less so if your income was on the higher side. But since, as we just learned, most seniors need about 80% of their former earnings to live comfortably in retirement, you'll need a healthy nest egg to pull that off.

3. Know your nest egg's real value

Many people go into retirement with a false sense of confidence because they know they've amassed a substantial sum in an IRA or 401(k). But rather than get hung up on the ending balance you see on your account statement, be sure to understand what it actually gives you in terms of annual income.

As a general rule, you can expect to withdraw about 4% of your nest egg's value each year without having to worry about depleting it prematurely. That 4% isn't a given -- if you're retiring on the early side, you may need to be more conservative -- but it's a reasonable starting point. This means that if you're looking at a $1 million IRA or 401(k) going into retirement, that actually only translates into $40,000 of annual income -- less whatever taxes you owe to the IRS (unless you have a Roth account, in which case taxes don't apply).

Now this isn't to say that you can't live on $40,000 a year (minus taxes) plus Social Security. The point, however, is to not get caught up on an impressive-looking number and instead understand its practical value.

4. Have a plan before leaving the workforce

There's a reason retirees are 40% more likely to fall victim to depression than working folks: All of that free time can quickly turn into a negative. That's why it's crucial to enter retirement with a plan for how you'll spend your days. Maybe you'll start a business or focus on a hobby. Or maybe you'll travel, if your finances allow for it. It doesn't matter how you choose to fill your weeks as long as you do so in a way that's meaningful to you. But be sure to have a game plan so you don't get lost in the potential monotony of schedule-free living.

Retirement can be a stressful prospect, but it doesn't have to be. Follow these rules, and with any luck, you'll end up enjoying it to the fullest.

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