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So much financial advice is centered on building up your nest egg for retirement, but it feels like so little is focused on helping you manage that money, whether you’re retiring early or on schedule. But properly managing your money in retirement is critical to ensuring that your nest egg is able to see you through your golden years without forcing you to scrimp or even un-retire.

Here are the most important things to consider when it comes to managing your money after you retire.

Don’t outlive your money

The key issue for managing your money in retirement is outliving your income. You’ll need enough income so you can avoid having to re-enter the workforce later on or otherwise do something drastic to meet your basic needs. That takes careful planning, even if you do have a substantial amount of money when you retire. You cannot be too careful about this concern.

The challenge is how to manage money in retirement: figuring out how to withdraw income from your investment portfolio to support you in retirement today, while still allowing for growth to supplement your income down the road.

Plus, if you’re retiring early, you’ll need to be sure you have readily available assets to tap, not just those in retirement accounts such as an IRA or 401(k). Many tax-advantaged retirement accounts won’t let you take withdrawals (at least not without a penalty) until you hit age 59 ½.

So if you’re retiring early, you’ll need to bridge the gap between when you retire and when you can actually begin tapping retirement funds and Social Security, which you can access as early as age 62, though you’ll receive a lower monthly benefit check then. In addition, you’ll need to consider your healthcare costs, since you won’t be able to access Medicare until age 65.

Add up all those issues, and it can be tough to retire – but careful planning will help.

5 steps for managing your money in retirement

As you’re planning for your retirement, you’ll need to forge ahead as best you can. You won’t have the safety of a job to bolster your finances, so that means every financial move should be carefully calibrated to ensure that you’re protecting your future.

1. Determine your budget

The amount that you spend is absolutely critical to how long your money will last. If you have Ferrari tastes, you won’t go far on a Ford budget. First off, it’s important to know how much you’ll spend in retirement, so you can work your budget around to meet those needs and wants:

  • Do you still have a mortgage on your home?
  • Do you plan to travel in retirement?
  • Do you plan to minimize expenses?
  • Can you minimize expenses just until you’re able to tap other income sources?
  • Will your spending ramp up now that you have more free time?
  • How will you pay for health insurance during any gap years?
  • Can you move to a top retirement destination and save?

You’ll need a good idea of how much you’ll spend in order to see how your assets can reach that goal.

In addition, you’ll need to be sure that spending early in retirement doesn’t derail your plans further down the road. If you deplete your resources early, you may need to cut back severely later on, just to make ends meet. Or it may mean going back to work later and earning much less than you’re able to now.

At this stage, you need to be as honest as possible – and then add on extra expenses for the unforeseen costs that always seem to crop up. If you start out more conservative with your estimates – meaning you assume you’ll spend more than you actually do – you’ll have more flexibility later.

2. Assess your assets and how long they can last

Figure out how much you have that’s immediately accessible to you in bank accounts, taxable brokerage accounts and elsewhere. If you’re older than age 59 ½, you can access retirement accounts with no penalties, and if you’re older than 62, you can start taking Social Security. However, you’ll want to carefully assess when the best time is to access that income stream.

If you’re retiring early, you mostly won’t be able to – and don’t want to – tap retirement accounts, though it’s possible to access cash in your 401(k) in a few ways. You can take a series of equal periodic payments or take a withdrawal if you hit age 55 and have left the employer associated with the 401(k). If you’re retiring early, tapping a retirement account should be a last resort and isn’t something to be taken lightly.

Based on your budget, you’ll need to calculate how long your assets can hold you until you begin to access more income:

  • Are you planning to start tapping retirement accounts once you hit age 59 ½?
  • Are you planning to take Social Security at age 62 or wait longer to get a larger monthly check? This Social Security calculator can help you figure your benefits.
  • Are you planning to wait until age 70 to collect your maximum Social Security check?
  • How will you pay for health insurance until age 65 when Medicare starts?

Even if you have the assets to bridge the gap until more income is available, you don’t want to endanger the rest of your later retirement by starting too early. Many experts say that if you’re retiring at age 55, you should plan for at least 40 years of retirement. If you’re starting even earlier, you’ll want to figure to live until at least age 95, so that you don’t outlive your money. Of course, if you’re retiring at age 65 or later, you won’t have to fund as many years of retirement.

So, when you make the leap to retirement, you’ll need to consider your whole retirement, not just the gap until more money comes in.

But how much should you withdraw? Experts often recommend the “4 percent rule.” The rule says you should withdraw no more than 4 percent of your retirement savings. By leaving enough in the account, your investments have a chance to grow in future years. And you’ll need to have growth over time to help combat the devastating effects of inflation on your assets.

The 4% rule hasn’t always been popular in recent years — many experts said the withdrawal rate might be too high, given the low returns on bonds and high inflation — but those trends are turning around, thanks to both higher bond yields and forecasts for lower long-term inflation. Bonds, after a rollercoaster year in 2023, were enjoying yields above 4 percent at the start of 2024. Opting for a more conservative 3-3.5 percent rule could have been prudent in the past, but as inflation cools and bond yields are high enough to outpace inflation, the 4 percent rule is looking favorable once again. 

These other withdrawal strategies may also help your money go farther in retirement.

Of course, the dream scenario is where you don’t ever have to touch principal. For example, if you consistently average 5 or 6 percent returns but only withdraw 4 percent (or less), your accounts can continue to grow over time, and your financial position can grow even stronger.

3. Balance your portfolio for income and growth

One of the largest challenges for retirees is balancing the need for income today with the need for growth in future years. And if you’re planning for 30 or 40 years of retirement, you’ll need to play things carefully with your portfolio to make sure you have money for today and tomorrow.

You’re looking to maintain a high degree of safety in your investments, and you’re trying to avoid being forced to sell when high-return assets such as stocks are down. So if you can generate enough income from only a portion of your portfolio and can let the rest grow, you’re probably going to be in good shape for the long term.

If you’re deciding how much to allocate to bonds and how much to stocks, retirement advisors have traditionally used the “Rule of 100” to help investors decide. To judge how aggressive your portfolio should be, you subtract your age from 100 to figure the optimal allocation to stocks.

For example, if you were 55 years old, the rule suggests that you should have 45 percent of your portfolio in stocks and 55 percent in bonds. If you were 65, the rule suggests you should have 35 percent allocated to stocks. So as you age, your portfolio becomes more conservative.

Bond yields have rallied after more than a decade of lackluster returns but some advisors still recommend using a more aggressive  Rule of 120 approach to set your allocation to stocks. Subtract your age from 120 to come up with your optimal allocation to stocks. If you were 55, this revised rule suggests you should have 65 percent of your assets in stocks. This higher allocation would give you more growth over time, and given a long retirement, you’re more likely to need that extra growth.

Managing a portfolio requires a lot of work, however. But if you don’t want to do it yourself, you do have some options.

First, you could work with a retirement advisor who can do that heavy lifting for you. Be sure you work with a fee-only advisor – one that you pay – to give you the best advice for your situation. An advisor paid for by someone else is usually just a salesperson in disguise, and they’ll often push high-commission products that are better for the advisor than they are for you.

Here’s how to find an advisor who will work in your best interest and what exactly to look for.

Second, if you’re looking for a do-it-for-me solution, you might opt for a target-date fund. These funds become more conservative over time, moving you from riskier but higher-return assets such as stocks to safer but lower-return assets such as bonds. If you buy a target-date fund that’s 10-15 years later than when you expect to need the money, you’ll have more potential growth in your portfolio, though it will also have more volatility, too.

4. Make withdrawals from the right accounts

It’s important that you make the most of your tax-advantaged retirement accounts. The longer you give them to compound without having to pay tax on the gains, the better off you’ll be. So retirement advisors recommend that the order of withdrawal from your accounts should be taxable accounts first, followed by tax-deferred accounts, allowing those special accounts to grow.

Given the extra value of these tax-advantaged retirement accounts, the difficulty of accessing the funds in them and the penalties that come along if you do need to take a distribution from them before retirement age, it makes a lot of sense to pay for your early retirement with funds in taxable accounts first.

Even when it does come time to tap your retirement accounts, it makes sense to use taxable funds first when you can.

5. Manage your money

Over time, you’ll need to keep up with your portfolio and make sure you’re staying on top of your day-to-day finances, too. Managing your portfolio well can help you avoid having to sell when the stock market is down, helping to preserve the long-term growth in your portfolio.

To do so, it’s vital to have an emergency fund of at least a year’s worth of expenses in cash. You won’t have to sell into the market if it’s down, and you’ll have the security of knowing your cash is available at any time. Some advisors even recommend at least two years’ worth of expenses or more, but depending on how much you spend, that may cost you a lot of extra return.

Many advisors recommend that their clients think about their finances in terms of three buckets:

  • Cash reserves: This bucket contains your cash and other short-term fixed-income investments that can be converted to cash with little or no loss. You can move these assets to a high-yield savings account to maximize what you’re getting. Your reserves help you stay in the game with your long-term investments.
  • Intermediate-term needs: This bucket contains investments that you’ll need for about three to seven years out. These investments can be weighted somewhat to safety, but given the longer time horizon, you can also have growth assets such as stocks here, too.
  • Long-term needs: This bucket contains assets that you don’t need to tap for seven years or longer, and you’re investing your money here into riskier, higher-performing assets such as stocks. The longer time horizon gives these investments more time to recover from the ups and downs of the market and go on to outperform. The goal here isn’t to shoot the lights out but rather to have a strong chance of solid long-term gains.

As you use money in your cash reserve, you’ll need to replenish it with cash from your other buckets. If you’re generating cash from fixed income investments or dividend stocks, you can move that from your other accounts to your cash reserve. But you can also harvest long-term capital gains and rebalance your portfolio at the same time.

For example, if you have a stock or stock fund that’s outperformed the rest of the portfolio, you can harvest some of that gain and move it to a safer asset that can generate income or even just into cash. Instead of trying to time when you do this, look for when your investments have dramatically outperformed and are way off your target allocation.

As you manage your money, it’s important to remember to keep safety in mind, both in the long term and short term. While it may feel safe to have all your assets in short-term income investments, you’re likely to lose out to inflation over time. On the other hand, you can’t have all your money in stocks either, if you need to use that cash in the short term.

Bottom line

Having the ability to retire comfortably can be a blessing, but success in retirement depends on making smart decisions that help you maximize what you have. You’ll want to balance spending with investing for the future to avoid outliving your assets. If you take a conservative path early in your retirement, you’ll be more likely to enjoy your later years even more.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.