The 401(k) Rule That Matters Most in Your First Year of Retirement

Your first year of retirement is an exciting, but stressful time. After all, you've worked hard for decades and invested in a 401(k) retirement plan to be able to leave the workforce. However, many retirees feel anxious during this time, hoping they have saved enough, adjusting to their new lifestyle, and wondering if they have planned appropriately.

One of the best rules new retirees can follow is learning how to live on a fixed income. That means developing habits such as tracking spending, budgeting your income, and taking the time to make a withdrawal strategy. All of these habits together help you to ensure your nest egg lasts for decades.

The most important rule: budget your income

Transitioning from a salaried lifestyle to a fixed income is an adjustment for many retirees. The decisions that you make in your first year of retirement and the habits that you develop set the tone for the rest of your life. 

Some people take considerable time developing a withdrawal strategy, but neglect to track their income and monitor their expenses. Without a budget, it can be easy to overspend, which might require making larger withdrawals in the future.

Ways to maximize your retirement income

To find other ways to maximize your retirement income in addition to budgeting, consult with a financial advisor and an accountant to ensure that you have a solid retirement plan moving forward. 

Many retirees have multiple streams of income. Some have pensions, IRAs, rental income from real estate, Social Security, and more, in addition to a 401(k). 

Knowing which retirement accounts to use first, whether to delay Social Security, and how to minimize your tax burden are all ways to maximize your retirement income. The earlier you have a plan, the better.

Part-time work during retirement

According to a Wall Street Journal survey, one in eight retirees plans to go back to work. 

For many people, they return to work because they need more income to live comfortably. For others, work provides a sense of fulfillment, community, and purpose. Having part-time work during retirement can also improve your finances and allow you to delay Social Security, for example. 

Your first year of retirement is a good time to test out how you feel about not working and living on a fixed income. Maybe people will enjoy it immensely and fill their time with activities. Others might feel lost without some type of work to do.

Tax changes to keep in mind

The amount of taxes you pay impacts how much of your retirement income you get to keep. One major 401(k) policy change is important for retirees to know: the RMD age is now 73, not 72. That means that retirees can allow their nest eggs to grow and compound for an extra year. 

This will be a positive change for many people. For others, consulting with a tax professional is wise, especially if delaying RMDs will increase their income and therefore their taxes.

The cost of health care in retirement

Another reason to learn how to budget during your first year of retirement is that as you age, your health care needs may increase. According to recent data from Fidelity, retirees will spend over $170,000 in retirement on health care costs. 

Many people don't anticipate how much their health care expenses will be. However, health care is sometimes unpredictable, and many retirees may experience health scares or need more appointments than they expected. Because health care needs change as you age, this is another important reason to learn how to budget and manage your expenses as soon as possible.

The impact of 401(k) fees

Finally, understanding the impact of 401(k) fees and investment costs can help retirees decide which fees to keep and which funds to sell. Often, 401(k) fees are hidden and buried in piles of paperwork. 

Taking the time to review your 401(k) fee structures and identifying which of your assets are costing you more can help you develop a strategy for your 401(k) assets.

Where to get retirement planning advice

When you are employed, your company's human resources department is the first place you can go to ask questions about your 401(k) plan. 

However, when you're retired, getting advice from a licensed financial planner and an accountant can help you create a retirement plan, understand the best withdrawal strategy, and ensure you have the skills and plan to help your nest egg last for many years.

Bottom line

To have a stress-free retirement, try to start on the right foot. During your first year of retirement, one of the most important rules to follow is to develop positive habits for managing your money. Living on a fixed income, tracking your spending, and taking the time to understand your 401(k) plan can all help you reach your retirement goals and enjoy your golden years more.

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