Retirement is a time of freedom for most people since you no longer have to spend your hours working and earning a living.
But while you're free to indulge your hobbies and decide what to do with your days, you still need to be smart about the financial decisions you're making and ensure you adopt good habits.
To help protect your financial security in your later years, here are three habits to put into place before leaving the workforce.
1. Living on a budget
Careful budgeting is crucial for retirees to ensure they can cover essential expenses. That's especially true given the fact most seniors have a fixed income and face high costs for medical services.
A budget allows retirees to allocate their dollars to the things that matter most, while ensuring they don't run short and end up in debt or take too much money out of retirement accounts.
Budgeting also allows seniors to spend more purposefully so they can best enjoy their newfound freedom. For some retirees, for example, having the money to travel or spoil grandchildren is crucial. A budget allows them to identify cuts they can make to free up cash for these purposes.
People are also reading…
By getting used to living on a budget before retirement, you'll be less likely to spend without a plan as a retiree. As a bonus, you can also budget in some extra retirement savings to bulk up your investment accounts before leaving the workforce.
2. Living within your means
Retirees typically receive a set amount of income from Social Security and the rest must come from savings.
To preserve their nest egg, seniors must ensure they maintain a safe withdrawal rate and don't take too much out of their investment accounts too quickly. One way to do that is to follow the 4% rule and only withdraw 4% of a retirement account balance the first year, adjusting upwards for inflation in subsequent years.
Retirees must ensure they aren't spending more than they can afford while maintaining a safe withdrawal rate. That means living within their means.
It's a lot easier to get used to spending less than you earn if you start before you actually retire. This can be especially crucial if you'll have less income as a retiree than you did while working and you must make adjustments to your lifestyle accordingly.
3. Rebalancing your investment portfolio annually
Finally, seniors should get into the habit of regularly reviewing their investment portfolio to ensure they have an appropriate mix of assets.
Over time, your portfolio could become too heavily invested in a particular type of asset or in a specific industry. When this happens, you could be exposed to either too much or too little risk. This is dangerous for any investor, but especially for people in or nearing retirement who may not have time to recover from losses or wait for the market to rebound in the event of a crash.
Rebalancing your portfolio involves shifting around your investments so you have the appropriate asset allocation based on your age and risk tolerance. You should get in the habit of doing this at least once per year before retirement so you don't jeopardize the chances of your savings supporting you.
The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.