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Building financial wellness in retirement

Key takeaways

  • Our 4-step financial wellness framework can help you feel financially fit and confident in retirement.
  • Budgeting, minimizing debt, developing an investing and retirement income plan, and protecting your assets are keys to financial wellness in retirement. 
  • Also critical is emotional preparedness as you redefine your post-work identity and find new ways to socialize.

Here's a simple question with no easy answer: If someone gave you $250,000 toward retirement, would you feel more prepared to stop working?

Fidelity research finds that having a quarter of a million dollars or more is an important milestone that can change a person's outlook when facing the many challenges posed by retirement. But money is only part of the equation. It's also important to feel financially well.

How can you achieve a sense of confidence and calm about your retirement? It’s different for everyone. But 2 keys to success are emotional and financial preparedness. And they are intertwined. Having a financial plan in place—including a budget, debt management, an investing and retirement income plan, plus protections like insurance and a will—can help you achieve the sense of overall wellness in retirement you deserve.

"Financial wellness planning can be critical for retirees and a financial wellness framework can help add structure to the process," says Sophia Mowlanejad, director of thought leadership in investment innovation at Fidelity.

Here are 4 steps that can help you feel financially fit in retirement.

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1. Go ahead and make a budget (again)

One of the key foundations of financial wellness in retirement is making sure you're spending within your means. With volatile markets and high inflation, budgeting wisely in retirement is particularly important.

Begin by breaking down your essential, or must-have, expenses. Then see if you can pay for them with predictable sources of income like Social Security, pensions, and annuities.

The discretionary, or nice-to-have, part of your budget including travel, gifting, and entertainment, should come from your retirement savings, such as 401(k)s and IRAs.

Here's something else to keep in mind: Your spending patterns will likely change in retirement and evolve as your priorities and needs shift. For example, essential expenses such as for housing, food, and transportation may all drop, while costs for health care could rise. Meanwhile, discretionary costs may increase early in retirement, as you take advantage of more leisure activities such as travel and dining out with friends.

2. Create a retirement income and investing plan

Many retirees are reluctant to spend what they've saved, largely because they may fear they will run out of money. That's the case even for people with adequate resources.

To be highly confident (i.e., it should work 90% of the time) that you won’t run out of money in retirement, our general guideline is to withdraw no more than 4% to 5% from your investment portfolio in the first year of retirement, adjusting that withdrawal rate for inflation in subsequent years.

Sticking to a 4%-to-5% withdrawal rate is especially important if you are retiring into a weak market, as bigger withdrawals can undermine your portfolio’s ability to rebound with the market. During a down market, you will need to withdraw less in dollar terms, and consequently may have less money for expenses.

How you invest is critical too. Depending on your risk tolerance, financial situation, and retirement horizon, you may want to construct a portfolio that allows for some growth. Generally speaking, a portfolio with more stocks might provide more growth over time, but it would also be more volatile.

Find out more about creating a retirement income plan here.

3. Think twice, or three times, about debt

Carrying too much debt is never a good idea, and it can be a barrier to financial wellness and a significant source of stress at all phases of life. That's particularly true in retirement, when some kinds of debt can pose a heightened threat.

Just as in the past, it's important to think about whether your debt can help you make progress toward, or could possibly derail, your longer-term goals. Generally speaking, debt with an interest rate below 6% for things that may increase in value, such as a home or an investment in your education, or something that can increase your earning power (assuming you plan to work), is generally considered good debt.

On the other hand, debt above 6% should be paid off as soon as possible—think mostly everything you charge on a credit card that isn't paid off before interest starts accruing.

Whether your debt can help you advance your goals or not, you should have a payoff plan. If it's credit card debt, pay more than your monthly minimum. Look around for lower interest cards to shift your debt. And remember, think carefully about the impact of any debt you know you can't pay off.

Two strategies to consider if you find your credit card debt is getting out of hand, for example, are the debt snowball and the debt avalanche methods. With the debt snowball, you pay off the smallest loan first and work your way up. (That way you can benefit from a feeling of accomplishment from watching your smallest debts disappear sooner.) The debt avalanche method is almost the opposite and involves tackling your highest interest rate loan first and working your way down.

You can find out more about these approaches in Viewpoints: 2 strategies for paying down debt.

4. Make sure you have adequate financial protection

Your financial situation can go from stable to uncertain in a short amount of time. That's why it's important to make sure you're protected, with adequate emergency savings, health insurance, a plan for long-term care, and an estate plan.

Three-quarters of retirees fear running out of money in retirement. Their chief concern is having a major health event, or needing nursing home care. These are fears worth paying attention to, as the average cost of health care for a retired couple age 65 in 2022 is $315,000, according to Fidelity's Retiree Health Care Cost Estimate.* Additionally, 70% of adults over 65 may require skilled care, with national estimates suggesting 2 years in a nursing facility could cost an additional $315,000.

Long-term care insurance premiums are primarily based on a number of factors, including age, gender, and marital status. So if you don't already have one, consider purchasing a policy. There are many different kinds, from standalone polices to hybrid life insurance plans. Do your research and make sure the company from which you purchase a policy is sound.

Read Viewpoints on Long-term care: Options and considerations

And if you haven't already done so, make sure you have an estate plan in place. That might include such things as medical directives, power of attorney, beneficiary designations, trusts and wills, as well as proper titling for property and homes. If you already have an estate plan in place, remember to go over it from time to time to make sure it still fits your situation.

It's more than money

Just as important as having adequate financial resources, and a plan for managing them, is finding your post-work identity. That may include new hobbies, educational pursuits, and new ways to have social interactions, all of which can help you develop a sense of emotional wellbeing.

It's important to tend to your "psychological portfolio" as well as your financial one, says Mowlanejad. That means coming up with an emotional plan for life after work.

Some common questions to consider are: What brings meaning and a larger sense of purpose to your life? What do you want to do with your unstructured time? How will you define who you are in your post-work life? Where do you want to live?

Answers to these questions and others can help you come to an understanding of what your new normal is. It can also help lead you to make smarter financial decisions in retirement.

Putting the pieces together

Financial wellness in retirement involves assembling and reassessing a number of planning components you've probably been thinking about for years. But your financial wellness framework is unique to you. "Everyone has their own story, created over a lifetime, and how they transition to retirement will also be so different," Mowlanejad says. As you consider what your own financial wellness looks like in retirement, consider working with a tax planner or financial advisor to create a plan that works now, and that will carry you far into the future.

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*Estimate based on a hypothetical opposite-sex couple retiring in 2022, 65-years-old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates projected with Mortality Improvements Scale MP-2020 as of 2022. Actual assets needed may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Cost Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

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