As a new year approaches, it’s the perfect time for anyone to reflect on their financial habits and set intentions for the months ahead. For retirees, retirement may offer the freedom to shape your days as you choose, but in order to maintain your financial health, it requires mindful planning and thoughtful spending. Use the fresh start of this upcoming year to implement or refine these essential spending rules to make the most of your retirement savings.
Set a Spending Plan for the Year Ahead
Start the new year by creating a detailed spending plan tailored to your needs and goals. Take some time to review last year’s expenses to establish a baseline and account for anticipated changes in the upcoming year. Whether you’re planning a big trip, taking on a new hobby, or anticipating increased healthcare costs, it’s important to map out your spending to help avoid any surprises.
As you plan, you can categorize your expenses into necessities (housing, utilities, food, and healthcare) and discretionary spending (entertainment, travel, dining out). Once you have a clear picture, calculate your withdrawal rate—how much you’ll need to draw from your retirement accounts annually. Ideally, this rate should stay at or below 5% of your total savings.
For example, if you have $1 million saved, your spending target should be $50,000 for the year. If you find your withdrawal needs exceed this amount, try and look for ways to adjust your spending so that your financial security stays strong through the years ahead.
SEE ALSO: Are You Taking Steps to Manage Risk in Your Portfolio?
Commit to Debt Reduction
The new year is an excellent time to tackle any lingering debt that could strain your retirement budget. Entering the year with a clear plan to reduce or eliminate debt—such as credit card balances, car loans, or even your mortgage—can help free up cash flow for other priorities.
Focus on high-interest debt first, as it erodes your financial flexibility the fastest. For example:
- Make extra payments toward credit cards or loans with the highest rates.
- Consider exploring refinancing options to potentially lower your interest burden.
- Allocate part of your annual withdrawals specifically toward debt repayment.
- Reducing debt also minimizes the need for large, taxable withdrawals from retirement accounts, keeping more of your savings intact for future needs.
Reevaluate Your Withdrawal Rate for the New Year
The start of the year is the perfect time to reassess your withdrawal strategy. While the “4% rule” is a common guideline, economic changes, market performance, and personal circumstances can shift what’s sustainable for your portfolio. For example, if inflation has driven up costs or your portfolio experienced strong growth last year, you may need to adjust your withdrawal rate.
If your portfolio experienced a 10% growth last year, it could potentially influence your spending decisions for the new year. Conversely, if markets struggled or you faced unexpected expenses, you may need to tighten your spending temporarily to preserve your savings.
Regularly reevaluating your withdrawal rate can help you be sure that it continues to align with your financial goals and the realities of your retirement each year.
Adopt a Consistent Withdrawal Schedule
As you look ahead to the new year, consider setting up a systematic withdrawal schedule to simplify your finances. A consistent, monthly withdrawal plan can create a reliable “paycheck” to cover your expenses, making budgeting easier and helping you avoid overspending.
For example, if your annual withdrawal target is $48,000, you can set up a plan to withdraw $4,000 monthly. This steady stream of income, like a salary, can provide a sense of financial stability and may help you resist the urge to withdraw your savings too quickly.
Additionally, a consistent withdrawal schedule can help manage your exposure to market volatility. By withdrawing smaller amounts regularly, you reduce the need to sell investments during market downturns, helping your portfolio recover faster when markets rebound.
SEE ALSO: Post-Retirement Investing: How to Help Extend the Life of Your Savings
Plan for Healthcare and Inflation
The new year is also an ideal time to prepare for rising costs, particularly in healthcare and everyday expenses impacted by inflation. As healthcare remains one of the most significant expenses for retirees, it’s important that you’re accounting for any potential increases in premiums, out-of-pocket costs, or long-term care needs.
As we know, inflation has become a huge issue for millions of Americans, impacting everything from groceries to travel costs. To help mitigate this, you may want to consider allocating a portion of your portfolio to growth-oriented investments, such as equities, which tend to outpace inflation over the long term. Balancing growth assets with more stable investments can help your portfolio remain resilient in the face of rising costs.
Look Ahead to Opportunities for Legacy Planning
The new year is an excellent opportunity to revisit your long-term financial goals, including plans for leaving a legacy. If you intend to pass on wealth to loved ones or support causes you care about, start the year by reviewing your estate plan. Make sure that your will, trust (if you have one), and any beneficiary designations are up to date and reflect your current wishes.
You can also consider using tax-efficient strategies to gift assets during your lifetime. For example, the annual gift tax exclusion allows you to give a set amount per recipient each year without incurring taxes—this can be a thoughtful way to support family members or charitable organizations while reducing the size of your taxable estate.
Stay Flexible and Adjust as Needed
Retirement is not static, and the upcoming year may bring unexpected changes—both challenges and opportunities. Whether it’s fluctuations in the market, evolving personal goals, or surprise expenses, maintaining flexibility is key. Schedule regular check-ins to review your spending, savings, and withdrawal strategy, and be prepared to adjust as needed.
If you have a particularly good financial year—such as strong investment returns or lower-than-expected expenses—consider saving the excess for future years. Conversely, if unexpected costs arise, identify areas where you can cut back to stay on track.
An Empowered Look Toward the Future
The start of a new year is a natural time to reflect on the past and plan for the future. By following these retiree spending rules, you can position yourself for a financially stable year ahead while still enjoying the freedom and fulfillment retirement offers. With thoughtful planning, disciplined spending, and a willingness to adapt, you can make the upcoming year one of financial health and personal growth.
It all starts with a well-thought-out spending plan and an investment strategy designed to support you throughout your retirement. No matter where you are on your retirement journey, Davidson Capital Management is here to assist. We offer transparent active investment management tailored to your needs. If you’d like to discuss retiree spending strategies or explore ways to enhance your investments and retirement savings, reach out to us today.
