In retirement, a budget is more important than in pre-retirement as a guide to tell your money what to do.
Education
As we move into other finer aspects of preparing our long-term financial plan, we once again must understand all of our potential options. Preparing a long-term financial plan must include retirement planning, regardless of the amount of time until you hit retirement age. The retirement age will differ for everyone. The paramount question to ask yourself is: Did I do my homework?
Learn what you need to have a successful retirement. One’s age does not matter, except the further away from your retirement age, the more time you have to get your plan in order. Your plan will require periodic reviews to assess if you are on target. Adjustments must be made so that you can hit your goals and have a comfortable retirement.
What follows are some aspects you must address as you move closer to that magic age. This is not meant to be an all-inclusive list but a starting point for assessing where you are and where you want to go.
Budget
Thought you were done with developing a budget? In retirement, a budget is more important than in pre-retirement as a guide to tell your money what to do. If you need help putting together a budget, see our article “How to Create a Budget for Success” at https://www.quadcitiesbusinessnews.com/how-to-create-a-budget-for-success/.
If you operate with a budget, this will require you to make some adjustments. The first question to ask yourself is: What do I not need in retirement?
Do you have two cars? Will you still have two cars? Insurance will be less with one car. Repairs could also be less. If you are no longer commuting, gas will be less.
What about life insurance? Are you still going to carry some? Is it necessary?
Go through your budget and ask if this expense will continue or how will this be different. With your retirement budget hot off the press, we now know what you will need to have a nice, comfortable retirement. Will your income support the budget or do you need to cut some expenses? Perhaps additional income besides the ones you have planned in retirement may be necessary. Be diligent. Make changes as assumptions become clear.
Taxes
This is a tricky topic to navigate. Tax laws are always changing. Unfortunately, we can only address what we know. Different states have different laws regarding retirement income and social security. Be careful, as taxes can and will reduce your disposable income. Perhaps you live in a state that has no state income tax or one that does not tax retirement income.
Sales tax is another tax you may look to avoid. A few states do not have state sales tax. In addition, if you stop working, Social Security and Medicare tax will not be paid by you.
As you begin to draw on your retirement nest egg, certain portions will be taxed by the federal government. For example, any withdrawals from your traditional IRA, 401K, etc., will be taxed by the federal government. In addition, you will be required to take RMD (required mandatory distributions) from traditional tax-deferred retirement funds. Any funds in Roth retirement, along with the earnings, can be withdrawn tax-free. Any pension you receive will be taxable.
As you can see, taxes can and will have an impact on your planning as well as your potential income.
Home Purchase
How is home ownership part of a retirement plan? Very simply, if your mortgage goes away, your housing costs are reduced. The costs needed for maintenance, electricity, insurance and HOA fees now become your housing costs.
If you are entering retirement renting or paying a mortgage, then your costs will be higher. Eliminating your mortgage before retirement and not renting will increase your disposable income. Either way, this could have a big impact on the budget.
If you have been following and building your financial plan, then you should have this under control.
Investing
Planning for this time by funding your retirement accounts at a level of 15% of your income will afford you to have accumulated a handsome nest egg. Retirement is what you have been planning for over these years.
Where is your nest egg? Do you have a traditional, Roth, 401(k), 403(b), 457, or pension? Some may even have a taxable investment account.
It’s time to review your portfolio. Where are your funds invested? Do you want to continue with the same strategy that was used before your retirement? Alternatively, will you change strategies? The overall objective is for your money to last longer than you may live.
Social Security, Medicare
This is where things can get tricky. There are many different variables of which to be aware. At what age will you begin to collect Social Security? What is your FRA (full retirement age)? Hint: it is not 65. FRA is generally between 66 and 67, depending on your year of birth and if further changes to the law are not made.
Be aware that a married couple collecting under the primary wage earner will have some significant income adjustments should one of them pass on. A spouse can collect about half of what the primary earner collects. Upon the death of one partner, the other partner’s benefit would stop. Only the higher benefit will survive. For example, for a married couple collecting Social Security under the primary wage earner, earnings will collect the primary wage earner’s benefit plus about one-half for the spouse’s regardless of earnings. Upon the death of either spouse, the lower benefit will stop.
Medicare, on the other hand, is available at 65. This is important because if you miss the window to sign up, you may find yourself paying a penalty for the rest of your life. So, get this on your calendar and sign up in a timely manner. What type of plan will you sign up for? There are many choices, so begin your research several months before you become eligible.
Estate Planning
So, you spent your entire life planning for retirement, you have done everything right and are enjoying a nice, relaxing time in your twilight years. Now what? What will happen to your assets when you pass on? Who will inherit them?
Make sure you have a will. Make the will as explicit as you want. Who will be your executor? Who will get what assets? Decide now; please, do not ignore this because if you do, the state will decide. Name primary and secondary beneficiaries on all your accounts. This is an area often overlooked. If you love your loved ones, leave a will. A will is nothing more than your final instructions as to how you want your lifelong financial achievements distributed after you pass on.
Conclusion
You thought you would turn 65 and life would be simple. Think again. Some of the items discussed above will help you make your way through the retirement maze. As you begin to create your retirement plan, reach out for expert help.
If you have an investment advisor, tax advisor and attorney in your current brain trust, reach out to them to guide you through the technical pitfalls.
Good luck!
You work hard for your money, make sure it stays your money!
Thanks for reading. I hope you found this helpful. QCBN
By Steven Calabrese
Steven Calabrese, CPA, is the CFO of Polara Health. He is the owner-operator of a website known as thepersonalfinancewizard.com, where topics such as budgeting, investing, paying off debt and goal setting are discussed.
