6 Best Ways To Spend Your Last Paycheck Before You Retire
Written by
Nicole Spector
Edited by
Molly Sullivan
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In the weeks leading up to your retirement, you may be so focused on the prospect of freedom just around the corner that you’re not thinking about that one final paycheck that’s coming your way. Or, maybe you are, but at this point, it just feels like icing on the cake or perhaps a nostalgic symbol that this is it: You really are retiring.
The last paycheck you get may feel special, or it may not. It doesn’t matter how it feels. What matters is how you spend it. So, what are the best ways to spend it? Let’s look at some possibilities.
Use It as a Cash Cushion
Consider putting your last paycheck toward a cash cushion — ideally one that will last you three months. That’s about how long it can take to make the full financial transition between employment and retirement.
“The switch from steady pay to retirement income can involve some awkward timing, as pensions and Social Security can take their sweet time getting started,” said Neal K. Shah, chairman at Counterforce Health and CEO at CareYaya Health Technologies. “Having that cash buffer allows a recent retiree to hold off on redeeming any of the long-term investments that make up the bulk of their portfolio.”
Save For Medicare Premiums
Once retired, you’re probably going to be relying on Medicare as your primary source of healthcare coverage. Depending on the coverage you choose, you may pay monthly premiums. Medicare Part B monthly premiums start at $185 per month — even if you don’t get any Part B-covered services, and that number can change.
“Most people pay Medicare premiums monthly, which is certainly one way to budget for the cost,” Shah said. “However, you can also pay your premiums annually. This will save you a little bit of money, and it will also make your life a great deal easier at the transition point between working and not working.”
Set Up a Tax Reserve
Your working life may be over, but taxes aren’t going anywhere. You might want to use your last paycheck to set up a partial tax reserve for retirement.
“Since there is no withholding from an employer, retirees must do the equivalent of a paycheck,” Shah said. “This means paying estimated taxes every quarter. You might find it helpful to set up a tax reserve account so that you have the funds necessary to pay your taxes when they are due.”
Make Last-Minute Retirement Plan Contributions
A smart move to make is to direct last-minute retirement account contributions to a tax-deferred vehicle.
“This not only buys you an immediate income tax deduction for the year you’re still working (if you’re still within your 401(k) or IRA contribution limits, of course), but it also helps put at least a little more in those retirement accounts before you’re no longer able to do so,” Shah said. “For one savvy planner we recently helped, she directed her entire last paycheck into her 401(k) plan.”
Pay Yearly Memberships in Advance
Another clever way to spend your last paycheck is to put it toward yearly memberships. Paying by the year is usually cheaper than paying by the month.
“Paying in advance for yearly memberships and services that provide discounts for payment in full can help lower your monthly expenses for the first year of retirement,” Shah said. “This tactic is especially useful for insurance premiums and maintenance contracts, and probably many of us will employ it for these obligations in our first year. But the approach can apply to other expenses as well.”
Celebrate!
If you’re more than completely squared away for retirement and have no financial concerns, it’s fine to use your last paycheck to celebrate this hard-earned achievement.
“Using part of your last paycheck to celebrate a milestone trip, a hobby or a meaningful experience can make the transition feel rewarding,” said Melissa Murphy Pavone, founder at Mindful Financial Partners.
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