Around 51% of individuals are able to sustain their initial spending levels throughout their later years.
Unfortunately, spending too much too quickly significantly reduces the likelihood that your money will last. This is because you’ll be left with a smaller principal balance earning interest. Not only will you be without the money you took out, but you’ll also be without the interest that money could have generated.
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The good news is that your initial splurges won’t definitely lead to financial disaster down the road. Here are a few ways to get back on track for the year 2025.
Determine a sustainable withdrawal rate
If you’ve overspent early in retirement, you can’t keep repeating the mistake and sinking deeper in debt. You need to determine a safe withdrawal rate, which is how much you can safely take out without depleting your savings.
One common way to determine your withdrawal rate is to follow the 4% rule, which suggests that you can withdraw 4% of your account balance and increase this amount each year to keep up with inflation. This approach should sustain your funds for 30 years or more.
Keep in mind that this 4% discount will be applied to your already reduced balance. As a result, you’ll over time spend less money than you would have if you hadn’t made the early withdrawal. However, be aware that you’ll need to consider taxes as well, since withdrawals from traditional 401(k) and IRAs are taxed as ordinary income. This means you may end up owing the IRS as well as your state taxes.
Living off of 4% of your retirement savings could require some adjustments to your spending habits, particularly when factoring in taxes. However, it’s often more practical to adapt to a smaller budget now rather than facing financial difficulties in your later years.
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Check out your current investment split.
As a retiree, you’ll want to be particularly careful with how your investments are structured because you won’t have the time to ride out market downturns. There’s a significant risk in having too large a portion of your investments in the market, as you could potentially lose money and be forced to sell at a low value, only to have to withdraw from your savings right away and possibly miss out on the market’s eventual recovery.
You don’t want to be too cautious with your investments, especially if you’re at risk of running out of money because of those initial splurges. Consider working with a financial advisor to develop a personalized investment plan that aligns with your financial needs since you’ve gotten off track initially.
If not seeking professional assistance, consider investing as much as one safely can. A general guideline is to subtract one’s age from either 110 or 100 and allocate that percentage of one’s portfolio to the market. As a more aggressive approach, subtract one’s age from 110 to potentially maximize returns with added equity exposure.
You may want to make an effort to save more money.
Finally, there’s another approach that could be the best one for you, if possible. You could explore ways to earn extra money so that you can rebuild your retirement savings fund to the level it’s supposed to be at.
There are many different ways seniors can remain engaged and earn extra income while still enjoying their retirement. Whether you approach past colleagues about part-time or consulting work, or explore opportunities in the gig economy, you should be able to find some way to increase your earnings and save for the future.
Be aware that if you’re under your full retirement age and work too much, your Social Security benefits might temporarily stop or decrease. Nevertheless, you’ll earn credits for the missed payments and may end up getting a higher benefit later due to those credits.
If you’re able to change your financial situation and save more money, you could make significant progress on building a stronger financial future, even if you’ve had a rough start. Just be sure to have a solid strategy in place for withdrawing your retirement funds when the time comes, so you don’t end up right back where you started after a few years of overspending.
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This article contains only information and should not be taken as professional advice. It is provided with no guarantees of any kind.
