Tips for Financial Health in Retirement
Making Your Retirement Savings Last and Thrive
Retirement might feel like the finish line after years of diligent saving, budgeting and planning. You’ve worked hard, clocked out for the last time and now it’s time to kick back. But just like the chapters in a gripping novel, your financial story doesn’t end here—it simply turns the page.
Now, instead of accumulating wealth, the challenge becomes making it last. Sure, you might have meticulously planned for this phase, but finances, much like life itself, aren’t static. Prices fluctuate, unforeseen expenses pop up and investments ebb and flow with the whims of the market.
In short, retirement doesn’t mean resting on your financial laurels. It’s about proactive management, occasional fine-tuning and being nimble enough to pivot when life throws its curveballs.
8 Ways to Thrive Financially in Retirement
1. Review your spending and income plan at least once a year. After years of working and saving, you likely started retirement with a plan for how much you can spend each year and which income sources you will rely on for living expenses. If so, you are off to a great start. But what if your expenses or income fluctuate from year to year?
During retirement, it’s common for individuals to realize they may need to spend more or less money than initially planned due to unforeseen circumstances. These situations could include expenses like home repairs, unexpected medical bills or fluctuations in the market. However, being aware of this possibility and making adjustments to your initial plan can alleviate any stress in the future.
Review your financial plan and investment portfolio annually, as well as after any major life events, to ensure you are on track and make necessary adjustments. It may also help to talk with a financial planner, who can help you anticipate your long-term spending patterns, identify potential surprises and implement proactive strategies.
2. Ensure your portfolio reflects your current risk capacity—not just risk tolerance. It’s important to know your risk tolerance – how much risk you can stomach – and adjust your investments so you can sleep at night. But once you retire, you must also know how much of your portfolio you can afford to lose without derailing your finances. This is where risk capacity comes in.
Your risk capacity depends on the amount of money you will require in the next one to four years, considering your personal objectives and circumstances. It is crucial to safeguard this money as you will need it shortly, and there won’t be sufficient time to recover from any losses.
To understand your risk capacity, calculate how much cash you will need in the coming year beyond what you can pull from predictable income sources like Social Security, a pension, income from a job or an annuity. Then, do the same exercise for the next two to four years. This is the amount you will need your portfolio to provide in the short term. It’s generally a good idea to keep a portion of your funds in cash or cash equivalents. This could include high-yield checking or savings accounts, money market funds, short-term bonds or certificates of deposit (CDs). These options can help ensure that your funds are readily available when you need them.
3. Understand how large withdrawals affect your savings. Keeping a short-term cash reserve reduces the need for large, unexpected portfolio withdrawals during market downturns. A market drop in the early years of retirement can cost you years of potential growth and income if you are forced to cash out to cover expenses. Later in retirement, market drops are usually less costly because, by then, you may not need your portfolio to grow as much. This potential scenario is called sequence-of-returns risk. It refers to the importance of timing when it comes to investment withdrawals. If you are forced to tap your portfolio as it is losing value, you will have to sell more assets to raise the cash you need. Not only does this drain your savings faster, but it also reduces your assets for future growth.
It is advisable to have a sufficient financial buffer, which should include a year’s worth of cash for any withdrawals or expenses you may need to cover from your savings. Additionally, you should consider having two to four years’ worth of cash available in relatively safe and easily accessible investments. This strategy can help you maximize your investments and minimize the impact of market fluctuations, allowing your portfolio more time to recover from any losses.
4. Have a tax-efficient withdrawal strategy. If you do not have a tax-efficient plan for liquidating assets during retirement, creating one can extend your savings. Not all investments are taxed the same way. A tax-efficient withdrawal strategy can help you take advantage of different tax treatments across your income sources and may result in significant tax savings.
- Take your RMDs. It’s important to prioritize making required minimum distributions (RMDs) on tax-deferred accounts such as traditional IRAs or 401(k)s. Failure to withdraw the full amount by the deadline may result in a 25% tax penalty. Keep in mind that RMDs begin the year you reach 73.
- Tap interest and dividends. For potential growth and income, refrain from touching your original investment and focus on interest and dividends from taxable accounts.
- Collect principal from maturing bonds and CDs. Reinvesting principal on maturing bonds and CDs is ideal. However, if you still need cash after RMDs, interest and dividends, it may make sense to liquidate them since the original principal is not generally taxed.
- Sell other assets as needed. Taxable and tax-deferred accounts are your next stop for more cash. But first, ask yourself if RMDs will likely push you into a higher tax bracket. If so, simultaneously drawing down taxable and tax-deferred accounts may help lower your taxable income. If not, selling brokerage assets that have lost value, followed by those you have held for a year or more, may make more sense.
- Consider saving your Roth IRAs for last. They are not subject to RMDs, and withdrawals are tax-free starting at age 59½, as long as you have held the account for at least five or more years.
Keeping tax-free Roth accounts untouched and potentially growing as long as possible is generally in your best interest. If you do not use the money in your Roth IRA during retirement, the tax-free status can be passed on to your heirs according to current laws.
5. Create a long-term care plan. LongTermCare.gov reports that around 60% of individuals over 65 will require long-term care during their lifetime. This can be quite costly. The median cost for assisted living is $54,000 a year ($4,500 a month), and a nursing home’s private room costs more than double that. If you do not already have a strategy for long-term care in your overall plan, it’s important to consider the possibility of these costs and how you would cover them if needed.
6. Update your titling, beneficiaries and will. Did you know that titling and beneficiary designations have the power to override the instructions laid out in a will or trust? If you decide to title a home as “joint tenants with rights of survivorship” for you and your spouse, it will typically be transferred directly to the surviving owner without requiring probate.
Check titling and beneficiaries on your bank, brokerage and retirement accounts, as well as on insurance policies at least every two years. Keeping them up to date will help ensure your assets are distributed according to your wishes. It also makes things easier for loved ones by minimizing probate.
7. Discover whether you require a trust. Everyone needs a will, but sometimes you want more control over assets, like overseeing funds for a minor or keeping a property in the family. Enter trusts. Trusts differ from wills in a few ways. They bypass probate court and can take effect before or after death, while a will takes effect only upon death.
Trust comes in all shapes and sizes, depending on your needs, so working with a qualified advisor is important to determine what will work best for you.
8. Consider the benefits of giving in retirement. Depending on your objectives, transferring assets while you are alive might be a better option than leaving them as inheritance. By doing so, your loved ones can enjoy the gifts right away, and you get to witness their enjoyment. Additionally, there could be tax advantages to giving now rather than later.
Currently, the annual gift tax exclusion lets you give any number of people up to $17,000 each ($34,000 for spouses splitting gifts) in a single year without incurring a taxable gift. You can make unlimited payments directly to medical providers or educational institutions for others without reducing your $17,000 gift exclusion or incurring a taxable gift.
In addition, the “lifetime gift and estate tax exemption” lets you give up to $12.92 million over your lifetime ($25.84 million for married couples), with no gift or estate tax for you or your heirs. This amount is separate from your annual gift tax exclusion. However, unless Congress chooses to extend the higher limits, it will decrease to around half that amount after 2025.
As you sail into the golden years of retirement, it’s clear your financial journey isn’t over. In many ways, it’s just taking a new turn. By adopting these strategies and staying involved in your financial health, you can maximize your retirement years, guaranteeing peace of mind and long-term stability. Contact an Adams Brown wealth management advisor to help you make the best financial decisions throughout your retirement.