What is the secret to success for a strong financial future and secure retirement savings?
What is the one key personal finance habit you should cultivate to have financial security now and for the rest of your life?
If you have a history of financial education, you might immediately equate financial health with a steady income, a balanced portfolio, rental income, or any other part of a fully complete financial plan.
Those are all important, but one lesson will help you reach your financial goals and ensure your retirement income is enough to both live on and thrive on.
What personal finance habit could this be?
The key lesson, the magic ingredient, is simply spending less money than you have coming in. In my experience, this one factor is the single most important predictor of success in maintaining your retirement budget.
The Rule of Thumb for Retirement Withdrawals to Make Sure Your Retirement Savings Will Last
If you withdraw too much money year after year, you'll accidentally diminish the principle needed for growth, but how much is too much?
You can work with a financial expert to figure out your best withdrawal rate for when you retire based on your unique income needs, savings amount, and investment strategy.
In general, financial experts recommend that you set a withdrawal rate of no more than 4% per year from your savings contributions, a brokerage account, or any other retirement account.
When you begin taking withdrawals, those funds should be set aside each year in a cash account, money market account, or something similar. Your annual spending (AKA budget) amount will no longer be invested.
When you begin living on the money you have saved, it's important to have that money set aside in cash. I recommend keeping 10-14 months of living expenses in the cash account.
Making good spending choices so you can live well on the retirement money allotted plays a critical role in having a happy retirement. Although unexpected problems arise, living within the budget allowed by your withdrawal rate will significantly reduce your stress.
How Poor Personal Finance Habits Can Ruin Your Retirement Income
Unfortunately, not everyone creates a spending plan and then sticks to it. If the habit of overspending is rampant during their income-earning years and they continuously operate under the notion that they'll pay it off later, retirement on a limited income might be tough.
Pulling out the credit or debit card is all too easy, especially when you know you have a million dollars in your accounts. Of course, you can buy the boat if you have a million dollars saved, right?
Not until you do some retirement planning!
When retirees start spending more than their portfolio can support, they can quickly enter the danger zone of running out of money.
There are three habits that run prevalent in families across America that lead to overspending during the years when on-the-job income is supporting the family budget, and these same habits, if unchecked, lead to excess spending in retirement too.
Rather than scrambling to reverse these chronic overspending habits in the later years of life, it's better to make lifestyle changes pre-retirement, so you'll have well-practiced positive money management skills during retirement.
Three Types of Overspending and How to Correct Each
You want to consider the three major types of overspending that could develop in your life and learn how to improve your personal finance practices now, so these problems don't follow you into retirement.
Overspending in these areas won't allow you to meet unexpected expenses and may put you at the mercy of market conditions.
Overspending on Children Can Damage your Retirement Budget
Overspending on adult children is one major way that many people blow their retirement nest egg.
Parents love their children and want to help meet their financial needs, but if not done with the budget in mind, at some point, the money can run out. It's important to consider how you could possibly help your adult children if you suddenly become reliant on your children simply because there's no more money.
It's okay to help your children or even bail them out of tough circumstances, but be sure to do it in a way that will preserve your budget.
The best way to help your children is to engage in smart planning before an emergency arises on their end. If you create a gifting plan that's reasonable and affordable for you, you can plan to generously give a fixed amount every year.
This can be in the form of a present at Christmas or as part of a loan with no interest charges to help your children have enough money to start a small business or otherwise begin building wealth.
You can do this via a check, direct deposit, or a cash gift.
This "free money" will be beneficial to them whether they are in dire straits or not.
Your children will learn to develop a spending plan based on what you are giving them, and you can relax knowing you are continuing to provide for your family while staying within your budget and making your nest egg last.
Overspending on Your Home Can Hurt Retirement Savings
Of course, having a big mortgage payment could negatively impact your retirement budget, but very few go house crazy when they near retirement. Most people attempt to downsize as they age.
However, there's a more insidious expense at play when it comes to housing costs during retirement: People tend to under budget for home repairs.
Sometimes you can miss a repair estimate by just a few hundred dollars, but if you're spending double or more of what you've budgeted on a regular basis, you need to make some changes.
If, in retirement or approaching retirement, you face some unexpectedly large home repair or maintenance costs, you have the option of making some lifestyle changes to compensate for the excess bill.
Other housing cost savings options include moving to a state with a lower cost of living or low/no income taxes, or downsizing to a smaller home in your area. Whatever the adjustment, it's better to make the change before you absolutely have to.
Spending on Travel and "Toys" Can Break Your Retirement Budget
Many people go into their retirement years with the intention to travel or buy a boat or get an RV and see America. Without a solid plan, these types of "big toy" expenses can blow through your savings and become a long-term money drain on your retirement budget.
A rule of thumb when it comes to fun expenses is to start planning for them while you are a working adult. Develop a good strategy for how you will have the retirement income to pay for these expenses in addition to the other necessities. This might include taking advantage of the match limit on your 401K and funneling savings into the HSA program your employer offers.
The solid money management skills you develop pre-retirement will allow you to spend your retirement creating wonderful experiences on the best budget possible.
You Can Create a Glorious Financial Future
Your future starts now.
As you start saving more for retirement, have your savings contributions automatically deducted, develop multiple streams of income, and build risk tolerance into your portfolios, you are creating habits that will make your retirement joyous and affordable.
One of the fundamental truths of life is this: don't let your expenses exceed your income.
Don't let the financial world intimidate you with jargon and overwhelm you with complicated plans. With well over a decade of experience in helping working world professionals prepare for retirement, I can guide you toward a retirement budget beyond relying on social security.
If you learn to live within your annual salary now and begin establishing a plan for your portfolio's expansion, you can have an epic retirement later.