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Financial Tips: Smart Spending to Live Your Best Life in Retirement

Written by Dana Brewer, CFP® | Aug 8, 2018 4:07:10 PM

If you're approaching or recently entered retirement, congratulations! Your years of hard work paid off! Now it's time to enjoy your retirement as much as possible.

But how do you know your savings will last as long as you do? Here are some financial tips to help make the most of your assets and live the retired life you always wanted.

  • Take the time to have a good understanding of your expenses. 
    We suggest tracking your spending for a few years prior to retirement to know what it really takes financially to fund your lifestyle. Often your take home pay minus any savings or investments is a good indicator of what you spend. Don’t forget those non-monthly expenses like real estate taxes or insurance premiums. 
  • Pay attention to financial costs that will change in retirement. 
    In retirement, we believe some costs can decrease like health insurance (for those over age 65) or vehicle expenses since you may no longer be making a daily commute. Just as often other expenses can increase such as travel, dental expenses, or those home improvements that you now have the time to do. 
  • Understand how taxes can impact your money.
    We often see retirees scale down their work lives to part-time verses not working at all. Once you start reducing your income your tax profile will change and continue to change each year as you scale back. This can create planning opportunities like lower tax brackets. It can also include pitfalls such as increased Medicare insurance premiums due to continued income, increased deductibility hurdles for some itemized deductions or impact how much of your social security will be taxed. 
  • Create your retirement paycheck.
    Most retirees have multiple investment accounts such as IRAs, Roth IRAs, joint and individual accounts. How you take money from each account to provide your needed income may impact your taxes differently. By planning out which account(s) to tap into each year you can potentially reduce your overall tax cost. 
  • Decide when to start social security.
    You become eligible to start your social security benefit at age 62, and if you delay, your benefits continue to increase through age 70.  Understand your options and how much money you may be leaving on the table should you decide to start early. In general, the longer you think you will live the more it can make sense to delay taking your benefit. The social security calculation is based on the assumption you will die at an average age. According to the Centers for Disease Control and Prevention the average life expectancy in the US is 78.8 years. If you are healthy or if your family typically lives much longer than average we believe that you may want to consider delaying your benefit. 
  • Consider your spouse’s retirement income after your death. 
    If you are a married couple you will also want to evaluate how social security impacts your spouse’s retirement income after your death. Strategies such as delaying the highest earning spouses benefit or leveraging a spousal benefit before switching to your own benefit may make sense for you.
  • Understand how your investments support your income needs.
    Stock and bond markets go up and down and that needs to be taken into consideration when you determine how much you will need from your investments to support your lifestyle. There are numerous studies available that try to identify the amount that can sustainably be taken from a portfolio with good odds that the money will last your lifetime. Mr. Cleary from T. Rowe Price claims, “No analysis can predict the future, but a four percent initial withdrawal gives you a high probability that you won’t run out of money, using a reasonably diversified investment strategy.1” We have found that the software we use at Birchwood uses a similar calculation.  For example, based on this strategy, if you have $1,000,000 of assets you could take $40,000 from your investments in year one. The taxes imbedded in that number will depend on what kind of investment accounts you are using. The amount remaining for you to spend after withholding taxes may vary based on your tax situation.
  • Don’t forget to budget for unexpected expenses. 
    We are big advocates of using savings buckets where you set aside money in savings account(s) for a variety of needs. We recommend an emergency account for most all of our clients and how much we would recommend you keep in the account is a factor of mainly two variables.
  • Your risk capacity – meaning how much capacity do your have to reduce your spending if needed. If you need every penny you are taking from your investments to just pay the bills you have very low risk capacity and we may recommend a higher emergency account balance.   
  • Sleep at night factor – how much do you need to keep in cash in order to be able to comfortably sleep at night when markets are down.  This amount varies greatly from person to person and both spouse’s needs should be considered since they may have very different perspectives. 
  • The Age 70.5 milestone. 
    At age 70.5 you are required to take a certain amount of money from your tax deferred accounts such as IRAs and 401(k)s. The IRS calls this a Required Minimum Distribution (RMD) and has determined the percentage based on your age. Each year the percentage increases slightly and is based on the prior year end balance in those accounts. You are required to withdraw the minimum amount and pay taxes on this money. You can always take more. For those retirees that prior to age 70.5 haven’t been taking any distributions from their retirement accounts or have been taking less than the starting RMD percentage of 3.65% they may see an increase to their taxable income. If from a cash flow perspective you don’t need the excess amount you can pay the taxes on the withdrawal and invest any or all of it back into a non-retirement account such as a joint or individual account. 
  • Expenses change over time. 
    As you work through your retirement plan consider the likelihood that your expenses will change over time. We often segment retirement into Go-go, Slow-go and No-go phases. 
  • Go-go usually involves a fairly active stage where you are still healthy enough to do items on your bucket list that you may not have had the time to do when you were working. This can be a more expensive stage.
  • Slow-go usually involves staying closer to home, minor health issues and slightly less expensive than the go-go stage.  Often some expenses may decrease like as going from two cars to one.
  • No-go stage happens when health issues have typically required you to either move into a facility that provides some assistance or you bring assistance into your home. Since these costs tend to increase over the slow-go stage, you may want to consider purchasing long term care insurance to help with the costs at this stage. 

The retirement journey is unique to each person and working with a financial advisor can help you navigate the twists and turns of your retirement road map.  By paying attention and planning for the potential “pot holes” you can make the most of your retired life.   

Sources

1 The T. Rowe Price: Retirement Savings Guide: Determining a Realistic Withdrawal Amount and Asset Allocation: https://individual.troweprice.com/staticFiles/Retail/Shared/PDFs/retPlanGuide.pdf