Retirement is a big deal and a huge life change. You have a whole new lifestyle and need a very different way of thinking about your money. In fact, your financial mindset needs to get flipped upside down. You need to go from a focus on accumulation (saving, saving, saving) to spending (efficient use and drawdown of your assets).
The transition from earning money and saving to simply spending is hugely challenging for most of us.
The big task in preparing for this mental shift toward money is creating a strong retirement plan — one that details how much you need to spend, what sources and how much retirement income you will have and how to optimize that income to get the most money while minimizing risk and taxes.
Here are 6 questions to ask yourself as you make your plan and prepare for this transition to spending your hard earned and diligently accumulated retirement assets:
Many people just assume that they are going to spend about the same amount as they always have and retire without a detailed spending plan. This can be a BIG mistake.
Your spending changes over time. Accounting for these changes allows you to build a better retirement income plan.
Here are some changes you might expect.
- If you retire prior to age 65 and aren’t covered under a health care plan for retirees, you may pay up to $1,000 a month or more for health insurance until you reach age 65 and begin Medicare.
- You’re likely to spend more on travel and entertainment early in retirement between the ages of 65 and 70.
- If you have a mortgage, it may be paid off at some point during your retirement years.
- Maybe you’ll be able to stop funding your children’s college education.
- You might relocate or otherwise change your lifestyle in a way that will dramatically change what you spend.
By planning your spending, you can get a much better idea of understanding what your real retirement income needs will be. This enables you to do some advanced planning and optimize your income sources.
The NewRetirement Retirement Planner can help you project your spending in a variety of ways. You can:
- Document your total monthly expenses and as many changes to that outlay as you can imagine.
- Get really detailed with your budget. Use PlannerPlus Budgeter to document your spending in over 70 different categories — document your tax status as well as necessary spending vs what you would like to be able to spend.
- Create plans for medical and the possibility of long term care spending
- Enter outstanding debts (and the system will automatically calculate your pay off)
- Plan for relocation, downsizing, buying a second home and more
- Attach an inflation rate to certain items and not others
As hinted about above, an important part of retirement budgeting and optimizing your assets for efficient spending is considering how much you really need to spend vs. how much would be nice to spend or how much you want to spend.
Needs: Money that you have identified as necessary for retirement would be invested conservatively. These funds should include any baseline spending for all of retirement. Really think about what you need for food, shelter, healthcare and other necessities.
Nice to Haves: Funds that could be used on nice to haves could be invested with modest risk. These are day to day expenses that you could potentially live without if you needed to.
Wants: A third account could be invested for growth. This is money that you have identified as wanting to spend — splurges, luxuries, big trips, helping grandchildren with education, etc…
The NewRetirement PlannerPlus Budgeter allows you to document and see your required spending vs nice to have spending — a powerful tool for planning the retirement you hope to have.
Just as your spending will go through spikes and troughs in retirement, so will your income. Different sources of income will start or stop throughout retirement.
Social Security may start during one year, a pension may start in a different year, and spouse may have Social Security starting in another year. Then at age 70 ½ you’ll have required distributions from retirement accounts such as 401(k)s and IRAs. Maybe you will have a part time job for a period of time. Perhaps you’ll have stock dividends for a while.
Retirement income can be particularly rocky during the first 10-15 years of retirement and then it typically levels out.
Again, the NewRetirement Planner can help you identify all of your different sources of income and how they will evolve over your retirement.
No matter if you plan to live on Social Security alone or if this benefit is just one part of your retirement income, the right Social Security claiming strategy is probably one of the biggest retirement income generating moves you can make.
Budgeting wisely, investing smartly and planning for taxes are important, but for most people, getting the most out of Social Security is probably worth more and is simpler to accomplish than all of those other things combined.
The difference between claiming Social Security early vs. waiting till the optimal time can be a difference of $100,000. And, securing a bigger Social Security payment for later in your life is hugely worthwhile.
Once you have a detailed picture of what you need and want to spend and what your income will be over different time periods, you can identify future income gaps as well as surpluses.
You have surpluses or “excess income” in your retirement plan anytime your monthly income from ALL sources — including Required Minimum Distributions (RMDs) — is higher than what you have specified for your total monthly expenses.
You have gaps when your spending outpaces your income and you can’t make withdrawals to fund the outlay.
The NewRetirement Planner can help you see when your spending is out of sync with your income.
- The cash flow chart can give you a rough idea of when these gaps and surpluses occur.
- The PlannerPlus Inspector can help you analyze these situations with more detail.
- On the “Work and Other Income” page of Your Plan, you can see how much excess income you will have over time.
Documenting and understanding how your income and spending will change over your retirement will also enable you to optimize your investments and tax planning.
Investments: You’ll want to think about what level of risk you can take with what percentage of your assets.
Savings you need should be invested in a way to guarantee it is there for you. For example: If you are delaying the start of Social Security to age 70, but plan to retire at 65 you’ll need larger withdrawals during the first five years of retirement. You want those withdrawals secured by safe investment options like bonds, CDs, or fixed annuities.
Taxes: If you have excess income that bumps you into a higher tax bracket, then you may want to look at ways to reduce income to reduce what you pay to Uncle Sam.
Withdrawal Planning: Think carefully about which accounts you withdraw from and when.
Depending on what type of accounts you have, you may need to go back and adjust your spending timeline to account for taxes. If most of your investments are in retirement accounts, those will all be taxable as you withdraw them. That means for each $4,000 withdrawal from an IRA, you may only have $2,500 – $3,200 available to spend after taxes.
Your Guide to a Retirement Withdrawals Strategy…
It IS a big deal to get used to spending your assets. And, it can be complicated to really optimize your spending and saving for maximum wealth.
Hopefully the NewRetirement Planner makes it easier for you to get used to this whole new mindset and be able to thrive in retirement.