Financial Basics

After years of hard work and careful planning, you’re ready to retire. Or, at least, you’re ready to start thinking about retirement. Perhaps you’ve been financially planning for retirement for a while. But now it’s time to really give some thought to your behaviors, feelings, and chiefly your financial plans to prepare for the transition into retirement and beyond.

Get mentally prepared

Whether you have a firm date in mind or your timing is less concrete, it can help to prepare both financially and emotionally for retirement. And while you’ve likely been saving money for retirement up to this point, figuring out how you’ll best utilize your hard-earned dollars, and how to make them last throughout your retirement, is probably unfamiliar territory. 
This will be an exciting time no matter how you choose to spend it, but now is the time to really picture what your life will be like in retirement. Will you work part-time or volunteer? Will you travel modestly to see family or take extravagant vacations to exotic locales? Will you downsize or buy a new vacation home? Thinking through these decisions will get you better prepared for the years ahead.  You might wish to consult with your tax advisor to help with your retirement planning needs.

Financial Basics: Elisabeth’s story

View From the Top

I like to seize opportunities. I never expected when I was rowing in my 40s and 50s that I'd still be rowing in my 70s. My retirement has given me more flexibility and ability to travel. It's like my daughter says, "I really want to go to Cuba. Do you want to come with me?" And I say, "Yes."

But there is a cost. I've always found that either you have the time or you have the money. But you don't seem to have both together. I have to keep in mind that money needs to last me and therefore I need to stay somewhat on budget.

When I first retired, TIAA looked at my budget and told me how things were going. She was very reassuring. You've worked hard for this. Now's the time to spend it.

Plan with your spouse or partner

Retirement details should not be sorted out alone. Instead, consult closely with your spouse or partner, or with interested family members and friends. Oftentimes, those close to retirement have these conversations too late in the process. Get on the same page with your partner as early as possible and determine how you hope to spend retirement.
You may want to consult a financial advisor as well as a tax advisor during this time, as they can help you think through these decisions and assist you in having a plan in place. Whether with an advisor or in discussion with your partner, here are some ground rules for consideration to help you and your loved one plan for your retirement years together.
  • Plan your future lifestyle. Determine if the lifestyle you want in retirement can be supported with what you have saved. If the answer is yes, you’re in great shape. But if the answer is no, you may need to consider some tradeoffs, such as delaying retirement or deciding to work part-time for a while.  Both you and your spouse should be aware of your joint financial situation to determine the amount of income available in retirement and to agree on goals for this time.
  • Determine what you want to spend. How do you envision spending your money?  Are you planning to use all your savings, or do you want to leave money or assets behind for your family or for a charitable cause? Finding a balance you both agree on is vital to retirement planning.
  • Think Ahead. Are there things you definitely want to do in retirement? For instance, do you plan to develop new hobbies? If so, you may want to prepare before you retire.  If you plan to buy a sailboat, and you haven’t learned to sail, consider investing in lessons while you’re still earning an income. Other priorities to consider researching prior to retirement include:
    • Do you plan to travel?
    • Would you rather move closer to the children and grandchildren?
    • What social activities, such as volunteering or charity work, would you like to do?
    • How much do you want to spend on leisure activities?
  • Discuss the emotional impact. While exciting, the journey ahead will also be an adjustment. For some people, ending a career can result in low self-esteem, and less income can create stress and anxiety. Discuss expectations for this time with your partner and create an action plan to combat any anxious feelings when they arise. You’ll want to be sure both you and your spouse are ready to retire, and you may want to discuss the possibility that one of you may want to continue working longer than the other (see below).
  • Decide on timing. If you and your partner are both currently working, you’ll want to consider your combined resources. Do you want to retire together or stagger retirement?  The latter will allow one of you to continue making contributions to a retirement account. It will also likely allow you to extend healthcare coverage, delaying the heightened out-of-pocket costs that will follow when both of you retire. Now, thanks to the SECURE Act, you can continue contributing money to a traditional IRA after age 70 1/2. In fact, you can even open one of these accounts for the first time after 70 1/2.
  • Consider your health. As couples age, they must think about their health. Have you saved enough to care for each other if one of you gets sick? Have you discussed your estate planning needs with your attorney?  Is your Will and/or Trust in order? Have you considered creating a healthcare proxy for the future and electing someone to legally make healthcare decisions on your behalf?  What sort of long-term care would you eventually like to receive? For more information on some of these issues, see our section on long-term care below.
  • Reconcile differences. Inevitably, you and your partner will not agree on every detail. That’s understandable. But if the differences are stark, independently make a list of individual goals and activities, and then pare down the list by finding common threads. For differing items, rank the importance of each for yourself.  Then, develop a list of common goals and prioritize those.

The importance of budgeting

One of the most important ways to prepare for the future is to create a well-thought-out budget that also includes some flexibility and wiggle room to account for life’s uncertainties. Keep the following considerations in mind when creating a budget for the future:
  • Be honest and specific. Consider how you envision your life in retirement.  Begin to assign costs to the items on your wish list, whether those items include a new hobby, road trips across America in an RV, or twice-daily massages in four-star resorts.
  • Consider spending changes. You’ll face new expenses in the years ahead, such as Medicare supplemental insurance if you were previously provided insurance through your employer. But you may also save money, perhaps through reduced commuting or dry-cleaning costs. Mainly, you will no longer need to save for retirement. If you set aside a sizeable portion of your take-home pay each month, this savings can be significant.
*This is an estimate and your actual needs may differ.
  • Think about long-term care. No matter how great your health is now, it’s likely you’ll need help at some point, so give thought to the kind of care you’ll eventually want to receive. Will you want to remain at home with part-time care, or move to an assisted living facility?
  • Continue to adopt a save-first mentality. As with all phases of life, you have to be smart about money during retirement. Continue to track your spending and net income (the money you make after taxes and benefits are deducted), use insurance and other planning tools to help protect you from life’s bumps, and understand how your dreams and your financial reality line up. These are universal characteristics of being a smart saver, and just as they helped you when you were younger, they’ll help you throughout your retirement as well.

Some next steps

Use our budgeting worksheet for additional guidance, and consider the following steps to pursuing a comfortable retirement:
  • Consider covering essential living expenses with guaranteed income
The biggest concern for many retirees is that they will outlive their money. You may be able to lessen this worry by building a minimum "income floor" with guaranteed income** that covers your basic living expenses. If you are invested in annuities available through your workplace retirement plan, you may already be on your way toward achieving this step. Learn about Lifetime Income from Annuities
**Guarantees are based on the claims-paying ability of the issuing company.
  • Be smart about Social Security and taxes
Consider taking full advantage of tax-deferred and tax-free savings accounts available to you based on eligibility such as a workplace retirement plan, Individual Retirement Account (IRA) or Roth IRA — and managing your distributions and taxes carefully to avoid unnecessary reductions in your net income. Original contributions can generally be withdrawn from Roth IRAs penalty free/tax free at any age. After 5 years AND age 59½, earnings can be withdrawn federal tax free.  Please note there are eligibility requirements as well as additional exceptions that apply.  Review with a financial advisor for more details.
When and how you draw Social Security can also affect your overall income and possibly your spouse's, too. Learn more about Social Security. Your tax advisor can help you determine when to take withdrawals from your retirement plan assets and when to start collecting Social Security benefits.
Please note withdrawals of earnings from a retirement account or annuity are subject to ordinary income tax, plus a possible federal 10% penalty if you make a withdrawal before age 59 ½.
  • Factor in healthcare expenses
Failing to account for possible healthcare expenses can derail even the strongest retirement income plans.  Though individual circumstances and costs vary, a 65-year-old couple retiring in 2019 would need an estimated $606,337 to cover health care costs in retirement.2 More about Medicare.
Next Steps

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1 2 Ways the New SECURE Act Benefits Retirement Savers, The Motley Fool 1/22/2020. 
2  Healthview Services Annual Healthcare Cost Report -  2019 Retirement Healthcare Cost Brief, 12/12/19.
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This material is for informational or educational purposes only and does not constitute investment advice under ERISA. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made  based on the investor’s own objectives and circumstances.