You may have reached retirement, but financial planning doesn't stop once you stop working. Frugal living and wise financial foresight can help ensure a comfortable life, and these simple tips will help you maintain stability for decades. Two of the biggest mistakes that people make when they reach retirement are underestimating how long they will live and the cost of future medical expenses. A woman who reaches age 65 can expect, on average, to live to be 84 while a man can expect to reach 81. Life does not end at retirement and neither should your planning.
Determine Your Needs
The first thing you should do is sit down with a financial planner to determine whether your current savings and lifestyle are sufficient for your future needs. Many people choose to retire too early because they overestimate their financial longevity. For instance, someone who chooses to begin receiving Social Security benefits at the earliest age (62), can expect his or her payments to be nearly a third less than someone who begins at the full retirement age of 66. Waiting until you are 70 to collect the benefits will almost double your payment when compared to starting at age 62. A financial planner can help calculate a working cash flow analysis so you can determine the distance between your potential retirement income and your standard of living requirements. Making the smart decision to delay your retirement by a few years may make you feel impatient, but it can help ensure a comfortable life for a few decades.
If you determine that your potential retirement income is less than your expected retirement needs, consider downsizing some of your assets. Do you still need the extra bedrooms in your home, or are they worth trading for a lower mortgage payment? Now that you and your spouse have stopped working, does it make sense to have two or more vehicle payments? Moving to an area with lower living expenses or even enacting a reverse mortgage can have a dramatic effect on the longevity and stability of your savings. Many retirees are reluctant to downsize their lifestyles, but it may be a necessary trade-off to have more time with family and friends.
Understand Your Retirement Accounts
Now is also the time to take another look at your 401(k) and IRA accounts. It is imperative that you understand the tax implications when distributing your retirement savings. Remember that withdrawals from your 401(k) or traditional IRA are subject to income tax, while withdrawals from a Roth IRA are not. Ideally, you want to deplete your taxable accounts before any non-taxable accounts in order to maximize the effect of compound interest on your untaxed gains. If you are over 50 and still a few years from retirement, take advantage of catch-up contributions on your 401(k). For traditional 401(k) accounts, the yearly contribution limit is raised by $5,500. Another way to delay withdrawals from non-taxable accounts is to consider a working retirement. A part-time income in your 60s can reduce your need to withdraw from your Roth IRA and make a big impact on the financial stability of your 80s. Should you need to move money from a taxable account be sure to read the fine print; early withdrawals and certain types of rollovers can result in tax penalties of up to 20%.
Balance Your Portfolio
Rebalancing your portfolio should be one of your main financial priorities when you retire. Many people, when they reach retirement, have a decreased tolerance for risk and choose to move heavily into bonds. This may be a safer strategy, but it can leave you short towards the end of your life when medical bills are increasing. Fidelity estimates that a 65-year-old couple will incur $220,000 in medical expenses during retirement. If you feel the need to lower your risk, consider moving into annuities or CDs instead of loading up on bonds, as these can provide guaranteed streams of income. When considering your portfolio's percentage of stocks, don't worry so much about making the wrong individual choices. Ideally, you should focus less on specific equities and more on overall asset allocation. Speaking with a financial planner can ensure that your portfolio contains an appropriate level of strong growth industries and long-term potential. Should you end up taking a loss, take it as an opportunity to apply it against your taxable savings and lower future taxes on your gains. Increasing or maintaining your risk via stocks may make you nervous but remember, you are still potentially planning for the next 20, 25 or 30 years.
Other Ways to Save
There are many small changes you can make to your lifestyle which, when combined, can take a big chunk out of your expenses. The first step is to make a long-term investment in your health with regular exercise. Your body, spouse and wallet will all benefit, and you can maximize the enjoyment of your retirement. Clipping coupons may have taken too much time when you were working, but now that your days are free, you can take advantage of any available discounts. Trading your vehicle in for a more fuel-efficient option can lower your long-term gas expenses. Becoming a member of AARP provides a number of discounts on entertainment, dining, and other purchases. Now that you have more free time, use it to research ways to lower your expenses and create a budget that allows you to do so.
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