How to Make Smart Choices in the First 10 Years of Retirement
The start of your golden years may seem like the right moment to put away your calculator and just begin enjoying the nest egg you worked so hard to save, but that’s not necessarily the case. While you should certainly enjoy the results of the decades you spent calculating, saving, and strategizing for your post-work years, it’s also important to keep being intentional about your finances. Knowing the potential pitfalls that lie ahead in the next decade can help you make the most of this special time. Read on to understand the five most common financial planning challenges retirees face – and what you can do to overcome them.
1. Saying Goodbye to Your Budget
After you’ve spent a lifetime saving, it can be tempting to simply enjoy your money for a while. The list of things you never got to accomplish or purchase can feel long—buying the car you’ve always wanted, purchasing a second home, traveling the world, or whatever fuels your passions.
While you don’t necessarily need to pinch all your pennies, failing to account for the price tag of fun and extras can add up to significant spending – and future financial planning challenges. Don’t sabotage your lifelong savings strategy; overspending can cut years off of the staying power of your assets. That’s why it’s smart to make sure the temptation to spend is counterbalanced by a savvy financial plan.
Creating a personal spending plan is easy. It’s just like planning a budget, but instead of seeing it as a restrictive set of guidelines, it gives you a way to plan out what you can buy and how you get to spend your hard-earned money. Calculate your monthly retirement income, create a goal, and track your spending. Doing so means you can enjoy what you have with the reassurance that you’re not creating financial planning challenges for yourself.
2. Failing to Create a Withdrawal Strategy
Saving for retirement is critical, but once you’ve said goodbye to your working life, you’ll need to switch your mindset from one of smart saving to one of smart withdrawals. What and how you plan to take that money out of your accounts is just as important as making sure it’s there in the first place. The most important aspect to plan for may be taxation. Capitalize on the wealth you’ve accumulated by making sure your withdrawals are as tax efficient as possible.
Different tax rates apply to different types of financial accounts. When you withdraw funds from a traditional IRA or 401(k), for example, the regular income tax rate applies. Roth IRAs and Roth 401(k)s, on the other hand, are taxed beforehand so any money you withdraw from those types of accounts is tax-free. The third common approach, withdrawing money from a taxable investment account, means anything you take out is taxed at the capital gains tax rate, which is different from ordinary income tax. Long-term realized capital gains may be subject to a different tax rate than ordinary income.
It can feel overwhelming to figure out what to pull from which account and when, but it’s an important step in avoiding financial planning challenges. After all, the last thing you want to do is get slammed with a significant tax bill when you’re trying to make your money last for the long term.
3. Forgoing an Emergency Fund
You can’t control the unexpected, but you can plan for it. Failing to create a safety net can create many financial planning challenges. Most professionals recommend that retirees have at least 12 to 18 months of expenses saved in a readily accessible savings account.
Though having a year and a half of expenses sitting untouched may sound like a lot of money, it can protect you during more than just an emergency. It can also serve as a cushion during an economic downturn. You may not need to spend it then, but it’s smart to have a safety net while you’re optimizing your portfolio to help combat inflation.
4. Not Accounting for Inflation
Considering inflation, it’s important to carefully evaluate the potential risks and benefits of the stock market, especially when you’re retired. The culprit is inflation risk. Retirees are more likely to feel the effects of inflation because they tend to have higher expenses, especially health care and housing, and these are goods with rapidly increasing costs.
Even a low rate of inflation can have a big impact on your purchasing power. Hypothetically, say the average annual inflation rate over the next 20 years is 3%. It will cost you $181 to buy the same items you can purchase today for only $100. To put it another way, the $100 you saved today will only be worth $55.37 two decades from now.
5. Trying to Go It Alone
When it comes to something as critical as your financial future, remember that professionals can help you win the long game of retirement. You may have handled all your finances solo thus far, but retirement is all about freeing up your time to pursue what makes you happy. To make sure your money can last as long as you need it to and that you can overcome common financial planning challenges, partner with a trusted professional.
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