The retirement years open a wonderful world of freedom and flexibility for most people. Proper retirement planning can make this transition in life a smooth process. You can trade a grueling work schedule for hobbies, volunteering or spending more time with grandchildren. All of this and more is possible, especially if you continue to practice sound money management during retirement that you portrayed to prepare for this phase.
Pre-Retirement Preparation
Before you retired, you were able to estimate your financial needs. Typically, you have an annual budget that considers three different categories of spending: essentials, discretionary and contingency.
The essential expenses during retirement include housing, food, clothing, medical care and outstanding debts. Discretionary spending may differ among individuals, but typically include entertainment, travel, hobbies and financial gifts for family members. The third category of spending - contingencies - is for expenses that may occur as your situation changes. These may include long-term medical services and tax increases.
While pre-retirement planning helped to build a nest egg to carry you through the retirement years, now you need a plan that will help you manage the money. The first important step is to stick to your budget. Even if you have over $1 million in your retirement account, this money has to last.
However, there are ways to extend the life of your retirement income. Initially, consider the money you are legally required to begin withdrawing from retirement accounts such as a 401(k) and/or IRA (individual retirement account). If necessary, you might consider a part-time job to supplement your retirement income. Try to wait until you have reached the federal age requirement to draw social security. Receiving benefits sooner will reduce your monthly payment.
Consider selling long-term assets if you have an immediate need for more income. Typically, any profit from the sale is taxed at a lower capital gain rate. With this strategy, you can keep more money in a tax-deferred account for long-term needs.
Selling long-term investments that have increased in value is a good way to manage your retirement money. Remember, the goal is to have the income you need to cover the expected and unexpected expenses in the absence of a steady income from employment. This also helps to rebalance some investments.
Diversification is especially important during retirement. You do not want to have too much money invested in one area. Consult with a certified financial planner and review your retirement portfolio at least once or twice each year. This can help you stay on track and ensure your retirement income will support the lifestyle you want.
Finally, practice discipline to control how much you spend. A general rule is to spend no more than five percent of your retirement income each year. This will keep money in your pocket, even if the market changes or an unexpected emergency occurs. You do not want one incident to wipe out your savings.
Proper planning and spending controls will ensure you can lead a rewarding life during retirement. This is not the time to worry about your financial situation; rather, you want to relax and enjoy what you have worked hard to achieve.
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