Managing Your Finances in Retirement: What to Do Now to Prepare

By Rev. James R. Cook, CFP®, RICP®

You might have heard retirement referred to as “the golden years.” Some people view retirement as a chapter in life when they can spend more time with family, on leisure travel, or starting a new hobby. Some retirees engage in activities they’ve always wanted to do but never had time to pursue while working.

Managing your finances in retirement is crucial to ensure a comfortable and financially secure life after you stop working so your golden years can truly be golden.

Here are some key steps and considerations you can look at now to help you manage your finances effectively later during retirement.

1. Assess your financial position

Before you embark on your retirement journey, it’s crucial to take stock of your financial situation. Evaluate your sources of income, including pensions, Social Security, investments, and any part-time work you might engage in. Create a comprehensive list of your expenses, categorizing them into essential (housing, healthcare, groceries) and discretionary (travel, hobbies) categories. This assessment will provide a clear understanding of your financial inflows and outflows.

2. Create a realistic retirement budget

Once you have a clear picture of your finances, create a realistic budget that aligns with your retirement goals. Strive to strike a balance between meeting essential needs and enjoying leisure activities. The 4-percent rule is a commonly used guideline that suggests withdrawing 4 percent of your initial retirement portfolio annually, adjusting for inflation. However, your unique circumstances might necessitate a different approach, so it’s crucial to tailor your budget to your needs.

3. Social Security planning

Understand when you become eligible for Social Security benefits and how different claiming strategies can impact your monthly benefit amount. Delaying your benefits can result in larger monthly payments, so consider your individual circumstances before deciding.

The minimum age to start claiming your Social Security income is 62. However, if you do not need the income and can afford to delay your benefits until your full retirement age, postponement might be beneficial. Claiming benefits before full retirement age will reduce your Social Security income. Keep in mind that full retirement age varies based on your birth year. Be sure to check the social security website to verify your full retirement age (https://www.ssa.gov/prepare/plan-retirement).

4. Plan for healthcare costs

As you age, healthcare expenses are likely to increase. It’s essential to plan for medical costs, including insurance premiums, deductibles, and potential long-term care expenses. Medicare is a fundamental component of healthcare in retirement, and you need to research it and enroll in it at the appropriate time.

However, Medicare doesn’t cover all your needs, so it’s important to consider supplemental health insurance (make sure you understand the differences between Medigap and Medicare Advantage) and long-term care insurance to cover potential gaps in coverage.

Budgeting for healthcare costs will prevent unexpected financial strain down the road.

5. Manage debt wisely

Entering retirement with substantial debt can impede your financial freedom. Strive to pay off high-interest debts before retiring, as interest payments can erode your savings over time. Credit card and other outstanding debts should be strategically managed to ensure that your retirement income isn’t disproportionately consumed by repayments. Some steps to take to manage your debt include:

• List all your creditors (except your mortgage creditor), the amount owed to each, the interest rates, and monthly minimum payments.

• Re-order your debts according to which you want to eliminate first.

• Now attack debt no. 1, repaying as much (more than the minimum) as you can each month until it’s gone while paying minimums on the rest. Then attack debt No. 2. Keep going until all your debts are gone.

The key to success: don’t build up new debts while paying off the old ones!

6. Emergency fund

Maintain an emergency fund to cover unexpected expenses, such as medical bills or home repairs. Having a safety net can help prevent you from dipping into retirement accounts prematurely.

Most experts recommend having enough saved to cover your living expenses for three to six months. Be sure to consider both fixed and variable expenses when determining how much you need to save.

Emergencies can happen at any time, so you need to be able to access your funds quickly. A savings or money market account with low fees and a low minimum balance requirement is the perfect place for your emergency funds. You should also try to find an account with a competitive interest rate so that your money can grow over time.

Always keep your emergency fund separate from any accounts that you use daily. This practice makes it clear that one account is for spending and one account is for saving. And definitely don’t put your emergency funds into high-risk investments, such as the stock market; you need to know your money is going to be there when you need it.

7. Lifestyle adjustments

Be prepared to adjust your lifestyle if necessary. If your expenses exceed your income, you might need to cut back on discretionary spending or explore part-time work opportunities.

8. Tax strategy

Understand how different types of retirement income are taxed and develop a tax-efficient withdrawal strategy. Depending on your situation, it might be advantageous to withdraw from different accounts in a specific order to minimize your tax liability. Make sure to speak to your financial planner and tax professional for guidance.

9. Investment strategy

Review and adjust your investment portfolio based on your risk tolerance, time horizon, and financial goals. While you might want to reduce risk as you age, it’s important to maintain a diversified, balanced portfolio that still provides growth potential to outpace inflation, because inflation can erode the purchasing power of your retirement savings over time. Diversification can help mitigate risks and maintain steady returns. A diversified mix of stocks, bonds, real estate, and other assets can help you weather market fluctuations while preserving your retirement savings.

Diversifying involves investing in assets that respond differently to the markets. When stocks are leading in the market, returns on bonds might be lower; but when stocks fall, the intent is that bond values would increase. Put simply, diversification means that at any point in time, your portfolio is likely to have a mix of winners and losers. Over time, however, they work together to achieve your investment goal with a level of risk you can accept.

10. Withdrawal strategy

Determine a sustainable withdrawal strategy for your retirement accounts. As mentioned before, the 4-percent rule is a common guideline, suggesting you can withdraw 4 percent of your initial portfolio value annually, adjusting for inflation. However, this rule might need customization based on your specific situation.

11. Plan for legacy and estate matters

Estate planning is not just for the wealthy. Nor is it just about distributing assets; it’s about ensuring your wishes are met, your assets are distributed according to your wishes, that your loved ones are provided for, and that potential estate taxes are minimized.

The truth is that every adult needs one, regardless of their age or wealth. ‘Estate’ means everything you own: your house, car, bank accounts, retirement accounts, investments, life insurance, furniture and personal possessions.

Consider what you want to leave behind for your loved ones. Review and update your estate plan, including your will, trusts, and beneficiary designations on your retirement accounts. These safeguard your legacy and make the transition smoother for your heirs by reducing the time and expenses that dying without a will would entail.

If you don’t have an estate plan, it’s wise to work with a licensed attorney that primarily focuses on estate planning and a tax preparer to create one. A good estate plan will address a number of potential scenarios related to disability and death and should include a will, any needed trusts, power of attorney to manage your affairs if you become disabled, and healthcare directives.

Once your estate plan is executed, you’ll want to review the plan every few years to ensure significant life events (for example: marriage, divorce, births, deaths) are incorporated into the plan.

12. Stay informed and adaptable

The financial landscape is ever-evolving, and your retirement strategy should be flexible enough to adapt to changing circumstances. Regularly review your financial situation, investments, and budget to ensure you’re on track to meet your retirement goals, and adjust it as needed. Consult with your financial planner regularly about your financial goals, plans and strategies.

Managing finances in retirement demands a thoughtful and strategic approach. Remember that retirement planning is an ongoing process; staying informed, seeking professional guidance, and making necessary adjustments will help you navigate the complex financial landscape and fully enjoy the fruits of your labor.