This Is How to Properly Pay Yourself in Retirement

Know your financial situation to a T.

Key points

  • Suze Orman says there are six things you should do to keep from running out of money in retirement.
  • Know your living expenses, keep two years in cash, and plan to spend no more than 3% of your portfolio in the first year of retirement.
  • It’s better to cut your spending now than plan on doing so in retirement.

You’ve done it. You’ve retired. Now, what? Well, for starters, you’ll want to ensure you’ve got a cash cow big enough to milk for the rest of your life. That means having a solid grasp of your finances, and leaning on good financial habits, like cash savings.

It’s never too late to start planning for retirement. The earlier you start, the better prepared you’ll be.

Why wait? Suze Orman, financial guru, tweeted six tips from her Ultimate Retirement Guide for how to properly pay yourself in retirement. Check out how you can prepare for the next step in your financial life right now.

1. Know your living expenses

Know how much it costs to pay rent, groceries, and your other essential bills. In the words of James Clear, author of bestseller Atomic Habits, we optimize for what we measure. You can’t even begin to optimize for low spending in retirement until you’ve measured your spending habits.

Sneaky expenses like subscriptions can drain your money without you even knowing it. Account for them. List both your monthly and annual fees so you don’t miss once-a-year payments. Don’t know where to start? Check out the average American’s monthly spending for a list of common living expense categories.

Don’t forget to automate where you can! Technology makes this easier than ever. A good budgeting app will track your expenses for you.

2. Calculate your reliable income

Interest. Stock dividends. Social Security income. Tally it up. It will give you a clear picture of how much money you’ll have coming in. Once you’ve measured how much you make, you can work on stretching that income through retirement if necessary.

3. Pay your fixed living expenses from guaranteed income

Build your retirement plan upon a stable foundation. Bare minimum, you’ll want to ensure that you can afford your fixed living expenses. These are the payments necessary to maintain your current quality of life. The biggest household expenses include mortgage, insurance, and grocery payments.

4. Keep two years of living expenses in cash

Even retirees must confront unexpected situations — like crashing markets — that derail financial plans. Prepare for them by keeping two years of living expenses in cash.

Cash is catch-all insurance for the unexpected. It gives you the flexibility you need to gracefully handle financial surprises in retirement. The alternative is being forced to sell stocks for a loss, or taking out interest-bearing loans to pay for a house you can’t sell. When you’re in a pinch, cash is king.

5. Hatch an RMD plan

RMD stands for required minimum distributions, the minimum amount of money a retiree over 72 years old must withdraw from their tax-advantaged retirement accounts. Remember to make the withdrawals before the annual deadline, or you’ll be fined by the government.

Failing to withdraw enough money can cost you thousands of dollars. Figure out your RMD for the year by using the RMD calculator offered by AARP.

6. Plan to spend no more than 3% of your portfolio in your first year

Build good financial habits. You may be thinking of spending a little extra your first year and cutting back your second. That’s a slippery slope. Suze Orman recommends planning to spend no more than 3% of your portfolio in your first year of retirement.

For example, if you have $1,000,000 in assets, you’ll want to spend no more than $30,000 your first year. If that seems low, remember that you may be supplementing that spending power with alternative income streams.

Stick with good habits. According to James Clear, the expert on habits, “You can break a habit, but you’re unlikely to forget it.” Don’t risk your financial future by forming unsustainable financial habits your first year of retirement. Start retirement right, then go from there.

What if you don’t have enough money?

Save more, delay retirement, or stay employed. That’s it. That’s all you can do.

Say you want to save more. Consider contributing 10% of income to a tax-advantaged retirement account to maximize savings. Automate contributions to make saving even easier.

You can retire as soon as you’re 65, but there’s a catch. You can delay retirement to increase your Social Security benefit. Consider this when calculating your reliable income.

Speaking of reliable income, many folks work through retirement. Reasons for doing so include supplementing Social Security income, maintaining a lifestyle, and doing meaningful work. Even picking up a light side hustle can help you properly pay yourself in retirement.

One more thing

I’m reluctant to bring this up, but it bears saying. You can always plan on spending less to make retirement more affordable. Consider a timely move — the best states to retire in offer retirees the most bang for their buck and high quality of life. By planning on spending less, you save more.

That said, be wary of slashing spending left and right. Keep your plan realistic — cut too much, and you might struggle to avoid falling into old spending habits. Better to reduce spending right now than to plan on reducing spending later. That way, you can build good financial habits that will serve you by the time you reach your golden years.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.