If you think the hard part of retirement is finally reaching the finish line, I’ve got some bad news. It turns out the first five years after you stop working are actually the most treacherous.
A recent study from Nationwide found that a staggering number of new retirees are running into financial walls they didn’t see coming. We aren’t just talking about a few bucks here and there; we’re talking about fundamental shifts in how they live and spend.
According to the research:
“…more than half (55%) of recent retirees say they have regrets about how they saved for retirement, with 28% wishing they began saving earlier and 13% wishing they contributed more to their retirement savings and investments each year more than 1 in 4 retirees say their cost of living in retirement is much higher than they expected.”
The reality is that retirement isn’t a static event. It’s a transition, and if you don’t nail the first few years, you might spend the rest of your life trying to catch up. Here’s what the data says about why those early years are so tough and how you can avoid the same traps.
The shock of the “fragile years”
Financial planners often call the period right before and right after you retire the “fragile years.” The Nationwide study highlights why: 38% of recent retirees found that their expenses were higher than they anticipated.
When you’re working, your lifestyle is often dictated by your commute and your office hours. Once those are gone, you’ve suddenly got 40+ extra hours a week to fill. For many, filling those hours costs money. Whether it’s travel, hobbies, or just more trips to the grocery store, the “spending honeymoon” is a very real phenomenon that can wreck a long-term plan if you aren’t careful.
(See 7 Unusual Ways to Cut the Cost of Living in Retirement)
The regret of the early claimer
One of the biggest takeaways from the study involves the timing of Social Security. A massive 70% of retirees surveyed said they’d change how they manage their finances if they could go back in time. One of the top regrets? Claiming Social Security too early.
It’s tempting to grab that check as soon as you’re eligible at 62, especially if you’re feeling the pinch of those higher-than-expected expenses. But doing so locks in a permanently lower benefit. If you’re healthy and can find a way to bridge the gap, waiting even a few years can make a massive difference in your monthly income for the next three decades.
How to protect your portfolio
The reason those first five years matter so much is something called “sequence of returns risk.” If the stock market takes a dive right as you start pulling money out of your 401(k), it’s much harder for your portfolio to recover. You’re effectively selling stocks at a discount while also depleting your principal.
To fight this, you need a plan that doesn’t rely entirely on the whims of the S&P 500. Here’s what the experts suggest:
1. Build a cash cushion: You should have enough money to cover at least one to two years of living expenses in a high-yield savings account or money market fund. This way, if the market crashes in year two of your retirement, you don’t have to sell your investments at a loss to pay your mortgage.
2. Be flexible with your spending: The Nationwide study found that the most successful retirees are the ones who can adjust on the fly. If it’s a bad year for the markets, maybe you skip the big European cruise and stay closer to home.
3. Rethink your withdrawal rate: The old “4% rule” isn’t a law of nature. If you find your expenses are higher than you thought, you might need to work a part-time gig for a year or two to keep from draining your accounts too fast.
(See $1 Million Will Last Retirees 26 Years in This Big City)
Don’t ignore the tax man
Many retirees are shocked to find out how much of their “income” actually belongs to the IRS. If all your money is in a traditional IRA or 401(k), every dollar you take out is taxed as ordinary income.
The study found that many people didn’t account for the tax bite on their distributions or the fact that their Social Security benefits might be taxable. It’s a good idea to talk to a pro about “tax-loss harvesting” or doing Roth conversions before you officially call it quits.
The bottom line is that retirement isn’t a “set it and forget it” situation. It’s a job in itself, especially during those first 60 months. If you can get through that window without blowing your budget or claiming your benefits too early, you’re in a much better position to enjoy the decades that follow.