Pay off all debt. "Ideally, you enter retirement with zero consumer debt," says Quinn. "If you're still paying interest on credit cards or paying off your mortgage, it's a red flag that you need to start conserving your resources." When you own your home outright, you protect yourself against inflation. Not only do you cut your living expenses by not having a mortgage payment, but you also have the option to sell your home and rent or downsize to a smaller house. Be sure to pay off your mortgage out of income, though, not with cash from your IRA or 401(k). Retirement accounts provide liquidity and are protected from creditors so you keep them intact if at all possible.
Hammer out a budget. The classic rule of thumb still holds: You can afford to spend 4 percent of your total savings the first year you retire. For simplicity, take it in a lump sum, deposit it in the bank or in a money market mutual fund and budget it for paying 12 months' worth of bills. Each subsequent year, you can spend the same amount of money you did the previous year, plus an adjustment for inflation. (Already taking out more than that? Cut back now! The sooner you rearrange your life, the better.)
Consider a reverse mortgage — very carefully. It's not right for everyone, but for older people with significant equity in their home, this can be a good option. A reverse mortgage allows you to borrow against your home equity without having to repay until the home is sold. You can take the tax-free money in a lump sum or in gradual withdrawals from a credit line. Bryant says it's best to wait until you're 75 to exercise this option, even though you can legally do so after age 62. If you apply too early, your monthly payments will be lower, but you will also eat into your savings, which you may need later on. Talk to a financial planner to find out if this type of mortgage makes sense for you.
Treat your retirement fund as if it were principal. Assuming you have other assets, you should think about using those funds when you retire instead of immediately tapping into your traditional IRA or 401(k). This allows you to continue to accrue savings in a tax-deferred retirement account.
"I think people feel more secure emotionally if they keep retirement funds intact until they really need them — and that's not a bad idea financially either," says Quinn. Once you reach 70 1/2, however, you are legally bound to start making withdrawals. (If you have a Roth IRA, there are no tax consequences to using the money whenever you want.)
Hold off taking Social Security as long as possible. "If you need the money to live on, you don't have a choice," says Quinn. "But if you can, hold off as long as possible." Your payments will be significantly larger the longer you wait. [To check exact figures log on to www.ssa.gov/retirement/1943.htmlse.]
Keep investing. Even after you retire, it's a good idea to keep a portion of your savings in stock-based mutual funds that pay dividends. If you put everything into fixed-income bonds, your savings will be chewed up rapidly as inflation rises. Talk to a financial planner for guidelines on how to allocate your assets.
Week 5: Live the Life You Love. »