Many Americans might envision retirement as a time of relaxation, freedom, and family. Making that dream a reality involves careful planning and diligent effort, especially considering that you’ll potentially be on a fixed income based on how you structure withdrawals from retirement accounts. When you’re out of the workforce, it’s finally time to cash in on the saving and budgeting that you’ve been doing for decades.
Once you’re finally looking at retirement just around the corner, you can use the same skills that you’ve used during your career to make your money go further in retirement. In this article, we review some helpful tips you can use to more effectively manage your finances in retirement when on a fixed income.
Taking Account of Your Assets and Income
An important part of this process is to know what kind of state your finances are in when you retire. It’s helpful to separate your assets into a few categories and treat each one differently based on the type of resource it is.
Private, Regular Disbursements
This kind of asset includes pension plans set up through your workplace, annuities that you’ve arranged, and reverse mortgages. You can lean on them in that order, as well. Your pension plan will pay out according to your company’s structure, so you have the least control over it and can consider it your core income. Annuities can be adjusted or managed in some ways to pull out more or less money depending on your needs, so the more that you can minimize these payments, the longer the annuity can last. A reverse mortgage is another way to cash in on the equity that you’ve accrued in your home without selling it, but pulling money out now can reduce its value in the long term if you intend to pass it on to your heirs or are concerned about your savings running low during retirement.
Public, Regular Disbursements
This category includes Social Security as its main source of disbursal. Based on how long you’ve worked and how much you made during your career, you can count on very regular Social Security checks every month once you start claiming them in retirement. Despite the terms being largely outside of your control, Investopedia notes that you may delay collecting these payments until you’re 70, at which point you maximize the monthly payments. Depending on your finances, it may make sense to delay collecting Social Security until that point so your payments are higher.
Private Savings
Your IRA and 401(k) fall into this category, as you have more control over when you start withdrawing funds from these retirement accounts. You may begin withdrawing even before retirement, but there are significant tax penalties for doing so. Similarly, you may withdraw from them later and let them grow in value in the meantime, but there are also penalties if you withdraw too late. US News reports that you can be penalized for waiting past 73 to start withdrawing, so you’re obligated to begin the process between ages 59 and 73. What you do with the money afterward is up to you; if you need the income, you can put it into your monthly budget. If not, then you can put those withdrawals directly into a savings account or invest them in another asset to save for later.
Private Holdings
Aside from your retirement accounts and other savings, you may have assets such as property or corporate shareholding that generate income depending on rental status and performance. However, many people will be relying on the previous three categories, especially those on fixed incomes.
Budgeting: Methodology and Intention
Once you know how much money you’ll have on hand and what you can expect on a monthly basis, it’s time to build your budget. Just like creating a budget during your working life, it can help to account for several categories.
Recurring Fixed Expenses
Rental payments, property taxes, utilities, and subscriptions all fit within this category. There may be a small amount of variance, such as using more electricity to run the A/C in the summer and more gas to heat your home in the winter, but you can predict these with reasonable accuracy.
Recurring Variable Expenses
In this category, you can account for vacations, dining out, going to the movies, shopping, and other generally predictable expenses that you anticipate. Many of these could be considered “discretionary spending,” but it’s worth budgeting for them if you intend to engage in a particular habit on a regular basis.
One-Time Expenses
These expenses include things such as going to the hospital, upgrading appliances, and paying for home repairs. You don’t know when they’re going to happen, but there’s a high likelihood that you’ll need funds for these things at some point. Given how expensive they can be, it’s especially important to account for them in your budget so that they don’t impact your financial planning too much when they do happen.
Buffer
Finally, it can help to build in 5–10% as a minimum to put away into savings accounts that you can withdraw at a moment’s notice. Market conditions, property values, and even government policies may change in the future, meaning you could no longer have access to the same fixed income several years down the line. You’ll also be able to use this buffer for other discretionary purchases or to offset the cost of multiple one-time expenses happening at the same time.
The most important part of planning your retirement may be to get all the information together and process what your financial situation is likely to be. As Annuity.org suggests, it can help to first determine your assets, income, and expenses before deciding how much to spend on purely recreational and enjoyable activities. Depending on your lifestyle, you can also keep money available to share with your loved ones when they’re in need or when you want to treat them well.
Resource Links
“How to Make a Budget for Retirement” via Annuity.org
“5 Tips to Increase Your Social Security Check” via Investopedia
“7 Things to Know about Withdrawing Money from a Traditional IRA” via US News