Planning for retirement can be complicated and stressful. You’ve worked hard for decades, and now you have to figure out how to manage your income streams and savings to enjoy a comfortable retirement. Don’t worry – there are precautions you can take to ensure your money lasts during retirement, no matter what stage of life you’re in.
4 Factors That Impact Retirement Finances
When managing your income and retirement savings, it’s essential to understand the factors that can impact your finances in retirement. Doing this can help you plan accordingly should something happen. Let’s take a look at some of these key factors.
1- Planning for Inflation During Retirement
Inflation refers to the general increase in prices over time. As inflation rises, it erodes your buying power, so the same amount of retirement money buys less than it used to. If your income doesn’t keep up with inflation, you will have fewer resources available to spend on goods and services in retirement compared to when you were working. To combat this, retirees should consider options like diversifying their portfolio. For some, this could mean more exposure to stocks and other securities that offer higher returns for others, it could mean investing in real estate or other tangible assets that could appreciate over time.
2-Taxes During Retirement
Retirees are typically required to pay taxes at a lower rate than those who are still working, but there are still taxes that must be considered during retirement planning. Depending on where you live, there may be state or local income taxes on pension payouts and property taxes due on any real estate investments you own.
Additionally, capital gains tax may apply when selling investments or other assets, while a gift tax might be due if you give away any large sums of money while alive or upon death. Factor these into your planning to determine how much money will be available for spending once all taxes are paid each year.
3- Risk Tolerance
Your risk tolerance plays an important role when planning for retirement since it dictates how aggressive (or conservative) your investment strategy should be when building out a portfolio for retirement savings and income needs. If you’re more risk-averse, investing more heavily into bonds and certificates of deposit (CDs) may make sense—but if you’re able to tolerate more risk and have a greater capacity for loss, then investing in stocks may provide better returns over time. Your risk tolerance should also factor into decisions regarding long-term care insurance; higher risks might require additional coverage depending on where you live and you current health status/needs assessment.
4- Don’t Forget to Account for Health Care Costs
Planning for healthcare costs is something every soon-to-be retiree should account for. This doesn’t just include medicine and doctor visits but long-term care costs as well. Long-term care insurance helps cover expenses related to medical treatment for individuals who cannot perform everyday activities such as bathing, dressing, eating, walking, and other activities needed for daily living due to chronic illness or disability. As we age, our risk of needing long-term care increases, so it’s essential to factor in this expense when looking into retirement planning options.
5 Steps to Manage Income
A clear understanding of the factors affecting your retirement savings is only one factor in managing your retirement account. Let’s also explore ways you can minimize your spending and maximize the longevity of your nest egg.
1- Create a Budget
Creating a budget is one of the first steps in managing your retirement funds. This is true whether you’re just starting or nearing the end of your career. A budget will help you identify where your money is going each month to see where changes need to be made. It will also help you plan for the future, allowing you to set aside savings for unexpected costs or long-term goals like travel or home repairs.
To do this, you’ll need to account for your retirement income sources. These may include Social Security payments, pension checks, annuities, and distributions from tax-advantaged accounts like IRAs and 401(k)s. Once you know exactly how much money is coming in each month, you can create a budget based on what your expenses are likely to be. Doing so will help ensure you spend your savings wisely before the end of retirement.
2- Maximize Social Security Benefits
Social Security benefits play an important role for many retirees, so it pays to know how to make the most of them. To maximize benefits, consider waiting until age 70 before claiming them. This will increase the monthly income since payments are highest when they start at age 70 instead of “retiring early” at ages 62-65. Additionally, it pays off to keep track of changes in laws regarding Social Security benefits, as these may affect how much money is available during retirement.
3 – Review Investments Regularly
Your investments play an essential role in generating income during retirement, so it pays off to review them regularly (ideally once a year). Diversifying asset allocation to invest in different asset classes, such as the stock market, bonds, mutual funds or exchange-traded funds (ETFs) can help you generate income throughout retirement. These aforementioned items are pooled investment securities that concentrate on various investments, such as commodity funds, stock funds or bond funds.
Whether you conduct a review yourself or work with your financial planner or wealth manager, you’ll want to consider any changes in investment needs due to changing interests, retirement plans or financial goals. This could mean selling some investments and buying new ones based on market conditions or personal preferences. When allocating your investment portfolio, consider adding fixed-income investments, which offer additional income through dividends or interest over time.
4- Tracking Retirement Accounts
Optimizing other retirement accounts, such as 401(k) and individual retirement accounts or IRAs can also be beneficial. This includes understanding the kinds of investments available through each account, as well as understanding when taxes must be paid on any withdrawals made from these accounts. Keep in mind some accounts may offer tax deferment or tax-free withdrawals depending on which kind they are and when they were established.
5 – Tax Planning
As mentioned above, taxes can play a significant role in the expenses you may have during retirement. Working with financial professionals like a CPA and a financial advisor can help you with the tax planning process as well as other important factors that may have a direct impact on your retirement income strategy. For example, depending on the types of income streams you have coming in each month, certain ones may have more tax advantages than others. Additionally, looking into ways to reduce your taxable income by taking advantage of deductions and credits available can also help you to save quite a bit in taxes every year.
Managing your retirement savings and monitoring spending requires careful consideration and strategic planning ahead of time so that you don’t find yourself running short on funds later down the line. Start by creating a budget that works best for your lifestyle and financial goals and review investments regularly so that they remain relevant with changing markets and interests. Invest wisely and ensure you have adequately diversified your asset allocation across multiple investments.
Take advantage of other resources around this topic like:
- Tax credits vs. tax deductions: what’s the difference?
- Strategies for reducing expenses during retirement
- I’m Retired. What Should I Invest in?
Serving as a way to help individuals take their financial goals into their own hands, Planning Made Simple members have access to resources like these as well as a community of other investors who can help answer questions, bond over investments or swap travel stories. The possibilities are endless. You can learn more about becoming a Planning Made Simple member today.