Congratulations – you’re retiring from the daily grind. You worked hard to get here, and now it’s time to relax and focus on you. These tips will help you manage your money in this new and uncharted stage of life and make the most of all you’ve worked for.
Understand your income. Because you’ll no longer be receiving a paycheck, understand that income will come from savings, pensions, social security and investments. Create a plan based on your expenses and life expectancy to determine how much you can transfer to your checking account for day-to-day expenditures.
If you’re drawing down from investments, you’ll want a firm grasp on how much you can spend without dipping into the principle. At the same time, you should be aware of mandatory withdrawals, which come with a significant tax penalty if you don’t do them on time and in the correct amount. As you plan expenditures, you may also want to create a “cash cushion” so that you don’t have to tap into stock investments if you don’t need to. It will also be essential to keep a handle on your investments during retirement so that they continue to yield the highest return, keeping in mind that your time to invest and your capacity for risk will change as you get older.
There are a lot of moving parts, but the bottom line is to make sure you understand where income is coming from and the best time and ways to access it.
Maintain a budget. In figuring out how much money you’ll have coming in, it’s imperative to figure out just how much you have going out. Take the time to create a realistic monthly budget, allowing for wiggle room or for unexpected expenses. Also, it’s important to adjust for inflation and for the event you live longer than your life expectancy.
Across the board, it helps to reduce expenses where you can. By no longer being in the workforce you can save by eliminating commuting costs or selling your second car. Paying off your mortgage can be a huge savings. Another option is downsizing, which frees up equity in your home you can use for investments or savings. It also results in less maintenance and lower taxes and utility bills. Another source of savings is from discounts for being a senior. Membership clubs like AAA Auto, Costco, and AARP all offer discount opportunities on everything from restaurants to car rentals. Many seniors forget about these discounts and end up paying more than they have to.
For the expenses you have left, try to simplify them as much as possible. Consolidate debt and savings, and consolidate your investments to one brokerage or firm. This can make tracking easier and eliminate any redundant fees or services.
Tune in to your health. Keep in mind that health care during retirement may be your biggest expense. It’s estimated that a man who retires at 65 today will need almost $190,000 to pay health care costs not covered by insurance. That figure increases to almost $215,000 for a woman.
Medicare will kick in at 65, but it doesn’t cover everything, and it also comes with fees for premiums, deductibles and co-pays. Fees for prescription drugs, dental, vision or hearing care must be paid out of pocket or be covered by supplemental insurance.
One way to offset these costs it to create a health care investment account specifically for health care expenses and keep those funds separate from other retirement money. You can also open an additional individual retirement account and earmark those funds for the same purpose.
Another strategy is to create a health savings account, which is beneficial for three reasons: Money is contributed pre-tax, so investing in your health savings account reduces your taxable income. Also, as long as you use the savings for health care expenses, you aren’t taxed on it. Finally, any growth on the invested funds is free from capital gains taxes.
Another strategy is to set up a long-term-care insurance or short-term care insurance policy. These vary in price and benefits, but they can help cover the cost of home care, assisted living or a nursing home.
Lastly, know that is can actually pay off to live a healthy lifestyle and focus on disease prevention. At this time of your life, eating right, not smoking and getting regular exercise can affect not only your health but your budget. A person in poor health spends an average of $1,700 more per year on out-of-pocket medical expenses than someone in good health.
Implementing these strategies and others can ensure your retirement is stress-free, and have you enjoying your hobbies and not stressing over your finances. To learn more about products and services that can help you leave the daily grind behind, contact us.
