The Best $10K You Can Spend When You Retire

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shapecharge / Getty Images

Knowing how to manage and use your money during retirement can be difficult. Establishing a money management plan will take time and require some flexibility.

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If you’ve recently retired or you’re getting ready for this next stage of your life, keep reading as we discuss some of the best moves you can make with your money.

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The Best Ways To Spend $10K in Retirement

Check out some of your best options to consider when spending a healthy amount like $10,000, and then read on for further advice on handling your retirement finances.

Home Renovations

With home prices increasing in many areas of the country, homeowners are using their added equity to take on home renovation projects. Doing so would allow you to make changes you’ve wanted to make and add additional value to your home.

For example, you could add an extra bedroom if you have an unfinished basement. The return would largely depend on your location, but estimates it would add 15% to 20% to your home’s value.

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Reinvest the Money

If you came into an extra $10,000 or had to take your IRA’s required minimum distribution, you could reinvest the money for additional gains. With company earnings continuing to be strong and the S&P 500 at a record high, this is an excellent time to continue taking advantage of a strong market.

Start a College Fund for Your Grandchildren

With the cost of college increasing, every dollar saved counts. If you feel your retirement is well-planned and you have extra money, consider starting a college fund for your grandchildren. You can either start a standard investment account and designate it for college expenses or open a 529 account. While 529 contributions aren’t tax deductible on your federal tax return, you may be able to deduct your contributions on your state return.

Consider an Investment Property That Can Be Passed Down

Real estate can be a great way to set up generational wealth for your family. If you have extra money to spend in retirement, consider purchasing an investment property for long-term or short-term rental. Real estate does come with work, including finding tenants, maintenance, etc. However, you can hire a management company to handle most of this work, and the property can become a passive income source for you and your family.

Preparing and Managing Your Money in Retirement

Handling finances in retirement is no easy task. Here are some steps to take to help you enjoy a comfortable retirement.

Have a Portfolio of Retirement Income Sources

It’s difficult to know exactly how much money to spend during retirement. You don’t want to spend too much and not have enough money later in life. But you also don’t want to be overly frugal and miss out on something you could have afforded during retirement.

To help with this, you should have a diverse mixture of retirement income. Think of these sources as your retirement paychecks. Your portfolio of paychecks will consist of guaranteed lifetime and variable paychecks.

Guaranteed lifetime paychecks include Social Security, pensions, income annuities and tenure payments from reverse mortgages. Variable paychecks include money from your retirement savings accounts and taxable investments.

Try to estimate your total retirement income from all of your retirement paychecks. That will give you a target for managing your living expenses. Giving yourself some wiggle room between the amount of income you’re expecting and the expenses you might have can help you prepare for any surprises that may arise during retirement.

Estimate Your Living Expenses and Create a Goal

Speaking of expenses, it’s important to estimate your living expenses and create a retirement budget. This will help you efficiently manage your money during retirement.

So, what’s the best approach to take to do this? Start by looking at your living expenses before retirement. On average, you can expect to spend between 55% and 80% of your current income annually in retirement. However, the exact amount will vary by person.

To determine your monthly expenses during retirement, start by organizing your current expenses into three categories: fixed, variable and one-time. You can eliminate expenses you’ll no longer have during retirement (child care, work clothing, etc.). Everything that remains should be made into a line-item budget.

Common expenses that should be included in your budget would be housing (unless you’ve paid off your mortgage), healthcare, taxes, transportation, food, entertainment, emergencies, travel and long-term care.

“Planning for retirement expenses is a crucial step,” said Maya Sudhakaran, the head of growth and acquisition at Plynk. “This should include new potential costs you may need to consider in retirement, such as healthcare expenses. Healthcare costs can be unexpected and quickly add up, so it’s essential to factor these expenses into your budget.”

Understand Which Accounts To Withdraw From First During Retirement

Another essential thing to figure out is how you will efficiently withdraw money from your different financial accounts. Many retirees will have taxable, tax-deferred and tax-free accounts. Most financial advisors will recommend starting withdrawals with your taxable account. From there, you would move on to your tax-deferred and tax-free accounts. The idea is that you will continue to let your 401(k) and IRA accounts grow for as long as possible. Remember that your IRA accounts require minimum distributions once you reach age 73.

Allocating Assets

As you progress through retirement, you may want your asset allocation to gradually become more conservative. This is because you will have less time to compensate for investment losses as you age. Most retirees are more interested in income investments than growth because they come with less risk.

You could follow the general formula for asset allocation by subtracting your age from 100 to determine your portfolio’s mix of stocks and bonds. For example, if you’re 75, you would have 25% of your portfolio in stocks and the remaining 75% in bonds or cash equivalents. If you’re 85, that mix would adjust to 15% stocks and 85% bonds. You will likely have drawn down most of your assets if you are lucky enough to live into your 90s. This is the time to preserve your capital by using low-risk income-producing investments.

“Consider investing in assets that can provide a steady stream of income,” Sudhakaran said. “This may include dividend-paying stocks, money market funds, or bonds. When in doubt, do your research. Financial education tools can help determine the best level of risk for your financial plan and ensure your investments align with your retirement goals.”

The Bottom Line

As you begin the new chapter of your life, planning how to spend your nest egg is important. It will be the difference between having a comfortable retirement and worrying you won’t have enough money as you continue to age.

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This article originally appeared on The Best $10K You Can Spend When You Retire