Why people want to make retirement money last differentiates from person to person. Some want to travel and enjoy grand experiences while others want to hunker down and live a quiet life. Either way, everybody wants to ensure they are getting the most out of their retirement money – and not run out of it.
Beyond investment returns, there are many important strategies to make retirement money last. Here are eight of the ones that we recommend.
- Define Your Needs, Wants, and Wishes
Knowing what it takes to cover your needs or “core living expenses” is essential. It gives you and your financial advisor a clear understanding of how much money you need to live comfortably. Then create a list of things you want, such as vacation travel, a home remodel, or a luxury car. The goal would be to achieve each of these goals but if one had to be sacrificed, you would be okay. Your wishes would include extravagant expenses, such as a second home in paradise. Your wants and wishes fall into the “lifestyle” expense category.
- Categorize Your Bank Savings
Nickname three bank accounts, one for emergencies and opportunities, another for core living expenses, and one for lifestyle. In the emergency/opportunity account aim to maintain a balance equal to three to twelve months of core living expenses. This buffer not only provides the feeling of security but provides options for when you have a sudden need for money and don’t want to dip into debt. The core living expense account should handle all your deposits and bill paying. The lifestyle account is for all the fun stuff like vacations and splurges. You fund it when you can, like when the stock market performs better than expected.
- Maximize Social Security
For many, postponing Social Security income can be financially rewarding. You have the option to delay your social security benefits past your retirement age up to age 70.According to US News, “For each year you delay the start of benefits past your full retirement age until you reach age 70, you’ll get an 8% increase in your monthly Social Security payments.”¹ For many this is helpful, but always have an analysis run the numbers to see if this makes sense for you. There are instances where it makes sense to take your Social Security income sooner.Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Advisor. Fixed insurance products and services offered through Montage Wealth Management or CES Insurance Agency.
- Create a Floor of Fixed Income
A floor of predictable or guaranteed income can make sure your essentials are covered.Common examples include Social Security, pensions, and annuities with guaranteed income. Then, during periods of turbulence in the stock market, you don’t need to worry about having enough money for food, shelter, transportation, and health care.
- Practice Systematic Withdrawals
Taking out money whenever you need it with no strategy can be dangerous. Especially for the core living expenses, you need to have a system in place so that you never run dry. Withdrawing the same amount every month or year will help you to budget more wisely.
- Minimize Income Taxes
It’s not what you make, it’s what you keep. Be selective about which accounts you withdraw money from. Many times it makes sense to withdraw from post-tax accounts first, then pre-tax accounts (IRA’s) last. There may be exceptions though. For instance, in New York residents can take $20,000 a year out of their IRA without any state income tax. You may want to take advantage of that. Also, if you are in a low tax bracket, you may want to take as much as you can at that low tax rate. And be careful not to take too much or you could inadvertently increase your Medicare premiums or lose a STAR property tax reduction.
- Be Strategic with Your Charitable Donations
If you donate money to charities, you may want to “bunch up your contributions” into a donor-advised fund. This method may allow you to get tax deductions otherwise forgone.And if you are age 70 ½ you are eligible to make tax-free donations. A Qualified Charitable Distribution (QCD) allows individuals who are 70½ years old or older to donate up to $100,000 total to one or more charities directly from a taxable IRA instead of taking their required minimum distributions.
- Invest Some Money in a Long-Term Account
In today’s world, new retirees can live another 20 to 30 years. With this long-term horizon, consider placing 5-15% of your retirement savings in a separate account for capital appreciation. Of course, only do this if you feel comfortable investing it in equities and letting it remain invested for the long haul. As you age into your 80s or 90s, you may want to reduce the amount invested in this account, unless you wish to bequest it.
I can’t emphasize enough how important it is to take advantage of these opportunities. By doing so, you are very likely to extend the life of your savings or have more to spend. Meet with a financial advisor as early as you can into your career so that when you retire, you can enjoy your retirement without pinching pennies.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Advisor. Fixed insurance products and services offered through Montage Wealth Management or CES Insurance Agency.
To get started on your financial plan with a Certified Financial Planner™ professional, schedule a call with Mark Colgan today!
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- Define Your Needs, Wants, and Wishes