While amassing a healthy nest egg to support your golden years is essential, once you’ve done it, one critical question remains: what happens next?
For many years spending and saving have gone hand in hand—and while prepping for retirement, accumulating assets may have been your primary focus.
Now that retirement is upon you, the tables have turned: suddenly, using your portfolio to produce tax-efficient retirement income becomes a top priority. You’re working with your advisor to figure out withdrawal strategies to support your life today and preserve your wealth for tomorrow.
How can you consciously and confidently make the switch from saving to spending in retirement?
Know Your Retirement Number
You likely won’t feel confident about spending down your nest egg if you aren’t sure you have accumulated enough to support your desired retirement lifestyle.
How much money do you need to retire?
The number varies for each person or couple depending on a myriad of factors, everything from:
- Desired lifestyle, like where you will live, how you want to spend your time, and more. A couple downsizing to a smaller home in a quiet neighborhood may end up needing less than a couple whose goal is to take a couple of big international vacations per year, for example.
- Health factors. Do you have a pre-existing condition that might lead to more medical spending? What’s your and your family’s health history?
- Longevity predictions.
- Income sources, like Social Security benefits, pension, retirement investments, real estate, cash, and more.
You and your advisor have likely worked closely to help you define your savings goal and make a plan to get there.
What happens if you’re a little off from your goal? There are several ways you can catch up.
- Delay retirement. Research concluded that working, even just a few months longer, can drastically increase your retirement savings. The National Bureau of Economic Research found that delaying retirement, even by just 3-6 months, had the same impact as saving 1 extra percentage of salary for 30 years! The same study discovered that you could increase your retirement savings by 7.75% by extending work by one year.
- Max out retirement vehicles, including catch-up contributions. For those over 50 (55 for an HSA), you can take advantage of catch-up contributions to stash away some extra savings for retirement. In 2021, you can contribute an additional $6,500 in your 401(k), $1,000 to an IRA, and $1,000 to your HSA on top of existing contribution limits.
- Invest a lump sum. Did you come into a sizeable inheritance? What about a larger-than-expected tax refund or another considerable financial gift? If so, consider investing all or a significant portion of it for your golden years.
Once you’re confident in your retirement number and your plan to get there, you can concentrate on building a healthy retirement budget.
Create A Concrete Spending Plan/Retirement Budget
The good financial habits you’ve cultivated throughout your life, like investing, saving, living below your means, donating to charity, etc., shouldn’t end in retirement. Retirement marks a new phase in your personal and financial life. And just about every stage of your adult life requires creating and maintaining a healthy cash flow plan, aka, a budget.
But how can you build a budget that represents this new season?
First, think about your current spending habits, including what will or won’t change as you retire. Retirees spend money differently. While you may not have a mortgage payment to worry about, those savings will likely be easily absorbed into your healthcare budget.
Knowing where your money is going gives you more control over your spending. Start with the big picture and ask yourself,
- Do you anticipate your cost of living to increase, decrease, or remain relatively the same? (Many retirees mistakenly believe that they’ll spend less in their golden years when in reality, spending remains relatively constant).
- Are there any big purchases you want to plan for early on, like a dream vacation, big move, etc.?
- Will you embark on an encore career or passion project? Will that choice require additional training, certifications, etc., and how much will that cost? You’ll learn that your photography hobby can get expensive quickly, for example.
Next, make an exhaustive list of your other projected expenses:
- Internet, Utilities, and Phone
- Insurance (Medicare premiums, auto, home, umbrella, etc.)
- Debt (mortgage, etc.)
You’ve got a solid handle on your spending; now it’s time to evaluate where your income will come from. Understand all of your income sources and make a corresponding plan to tap them.
- What percentage will you withdraw from your retirement, brokerage, and other investment accounts each year?
- What fixed-income sources like Social Security or pension do you have from month to month?
- How can you coordinate your income in tax-efficient ways?
You’ve worked so hard to build your ideal retirement plan, so ensure you spend, save, invest, and give your money with intention. Aligning your money with your goals and values brings more purpose to every dollar.
A Nod To Estate Planning and Preservation
Along with providing for your own needs in retirement, many people wish to preserve funds for the future.
If leaving an inheritance for your family or loved ones is essential, you want to invest the fund in the appropriate vehicles that transfer more money to your heirs rather than Uncle Sam.
For you, that might mean making your estate executor joint owner on a bank or investment account. Or, if you want to leave money for your grandchildren’s education, perhaps you safeguard that money in a 529 plan or a trust. You may also want to make charitable giving part of your wealth transfer plan, and there are several vehicles like charitable remainder trusts that can help you accomplish that goal.
Creating a wealth transfer plan considers the following: your goals, your assets, and tax efficiency.
While passing down wealth may be a goal, make sure you prioritize your needs. You may find that you need to dip into an inheritance vehicle to pay for long-term care or home caregiving services. It’s good to prioritize your retirement—it’s what you’ve worked so hard to secure.
Spend With Purpose
It may seem hard to believe at first, but it’s time to bring your retirement plans to fruition. Life as a new retiree will present different changes, challenges, and opportunities to take advantage of.
How you approach your money is one element that will likely undergo significant changes. It’s essential to create a plan to spend your hard-earned money in retirement. Doing so can help you spend wisely and in ways aligned with your goals and values.
An excellent place to start is working with an advisor who knows you and your goals and can help you structure a financial plan that enables you to bring your dreams to life.
We’ve built this practice to serve retirees. Retirement is an enormous transition, and curating a tailored plan fit for your life goes a long way to bringing confidence and clarity to the next phase of your life.
We’d love to help you find confidence, clarity, and joy in retirement. Set up a call with us today.