7 Best Ways To Manage Your Money After You Retire, According to a Financial Expert
Written by
Sean Bryant
Edited by
Rebekah Evans
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Retirement brings a lot of change. You might think that you only need to be smart about saving and investing your money. However, even people who’ve done a great job preparing for retirement can accidentally outlive their savings.
Yes, the steady paycheck you’re so used to will be replaced by other sources of income. However, if you want to maintain a comfortable lifestyle, you’ll have to learn how to manage your finances effectively. Here’s a step-by-step money guide to ensure your golden years are exactly what you want them to be.
Come Up With a Retirement Budget
If you’re not careful, spending more than you should is easy. That’s why budgeting is the first thing you must learn about wealth management.
When thinking about your retirement budget, you should figure out how much money you’ll need to maintain your desired lifestyle every year. To do this, write down all your expenses, from food to discretionary spending and ask yourself the following questions.
- Will you be traveling in your retirement?
- Do you still have a mortgage?
- How will you pay for health insurance?
- Is there any way you can minimize your expenses?
“Having a budget in place is absolutely critical,” said Anthony Saccaro, president of Providence Financial & Insurance Services. “A lot of people overlook the impact of inflation and don’t consider how long they might live, which are two big mistakes that can lead to financial shortfalls later on. It’s important to adjust your budget regularly for inflation and plan for a potentially long retirement to avoid outliving your savings.”
Find a Balance Between Income and Growth
Managing your investments is different during retirement. The golden rule is to find a balance between income and growth and focus on investments that match your risk tolerance.
Although the ideal strategy depends on your specific financial situation, in retirement, it is generally considered that asset allocation should be weighted more toward bonds and cash.
“What I see a lot of retirees doing, though, is continuing to invest heavily in growth-oriented stocks and mutual funds while making withdrawals to cover their living expenses,” Saccaro said. “This means they’re selling off principal, which can shrink their portfolio over time and increase the risk of running out of money. But if you’re living off the interest and dividends, you’re not touching the principal, so that concern goes away.”
Create an Emergency Fund
An unexpected expense can wreak havoc on your budget. That’s why having an emergency fund with at least a year’s worth of expenses is vital. We recommend choosing a high-yield savings account, which pays a higher interest rate than traditional savings accounts at a brick and mortar bank.
Withdraw Money From the Right Accounts
Every penny counts when managing your finances in retirement. Another important tip is to strategically withdraw from your tax-advantaged retirement accounts. Most retirement advisors suggest withdrawing money from taxable accounts first, followed by tax-deferred accounts.
“Many retirees have most of their money in pre-tax accounts like 401(k)s or traditional IRAs, which can make retirement expensive since you have to pay taxes on every withdrawal,” Saccaro added. “My experience tells me that the best scenario is to have about half of your money in pre-tax accounts and the other half in taxable accounts or Roth IRAs. This way, you can withdraw from the pre-tax accounts up to your current tax bracket limit and if you need more, you can pull from taxable or tax-free Roth IRAs. It’s a more tax-efficient way to manage your money.”
Prepare for Medical Expenses
Did you know that according to CreativePlanning.com the average couple retiring at age 65 will spend $315,000 to care for their health? Even with Medicare coverage and supplemental insurance, all the medical expenses can quickly add up. To ensure you aren’t surprised by the high costs, incorporate medical expenses into your retirement budget and try to set aside a percentage of your monthly income for this specific goal.
Focus on Your Priorities
Freddie Mercury may have sung, “I want it all and I want it now,” but if you want to be smart about your finances after retirement, it’s not a mantra you want to follow.
Thankfully, as we get older, we have a much clearer understanding of what’s important and what’s not. If you focus more on your priorities, you may spend less overall.
Don’t Stop Planning
You should start saving for retirement as soon as possible. It’s quite simple — the earlier you begin to plan and invest, the more time you have to build your wealth. But it’s equally important to remember that planning is a continuous process, not something you should stop doing after you retire.
Don’t forget to regularly review your investment portfolio and ensure all your operations are aligned with your risk appetite and financial needs.
According to a survey by the Employee Benefit Research Institute, almost 40% of retirees don’t feel confident about living comfortably throughout retirement. But you don’t have to be a part of this number.
Retirement is not the end of the road regarding managing money. In some ways, it’s more complicated than ever before. You must still adjust your plans and goals as you move through life. Early planning, realistic goals and smart management strategies will ensure you have peace of mind and enjoy a stress-free life until the end.
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