Financial literacy covers a wide range of topics, from budgeting and saving to investing and planning for retirement. Once you retire, however, financial literacy broadens to include scenarios that may not have been as relevant during your working life. For example, income typically drops in retirement, while expenses may remain the same or even rise, depending on the type of lifestyle you lead and the condition of your general health.
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Financial Literacy Month is a great time for both seniors and those about to retire to review their planning and make sure they’re prepared for the changes encountered in retirement. Here are seven topics that are important to understand if you want to avoid any financial landmines in retirement.
From the time you start receiving your first paychecks, you’ve been paying into the Social Security system. But as you approach retirement, it’s time to start planning your Social Security withdrawal strategy instead. Before you hit retirement, it pays to maximize your income in any way possible, as your Social Security payout is based in large part on how much you earn during your working career. You’ll also want to sit with a tax or financial advisor and determine whether you should initiate your payments early, at full retirement age or as late as age 70.
Medicare is a health insurance program for seniors, but it’s a complicated system with various parts. To use it effectively, you’ll have to become literate on how it works. In a nutshell, Medicare consists of two original parts, A and B, which cover hospital and medical expenses, respectively. Part B requires a monthly premium. You can also add Part D if you require prescription drug coverage. Medicare Advantage, also known as Medicare Part C, is an alternative to Original Medicare that is run by a private company. As the choices can get complicated, you’ll likely need to speak to an expert to get financially literate when it comes to Medicare. Note that neither Original Medicare nor Medicare Advantage are likely to cover care outside of the United States.
Dave Ramsey Says 401(k)s Have a Big Tax Downside –
Required Minimum Distributions
Just like you’ve paid Social Security taxes your whole working career, hopefully you’ve done the same in terms of contributions to your retirement plans. But you can’t keep your money in those accounts forever. At a certain point, accounts like traditional IRAs and 401(k) plans require you to begin taking annual distributions to avoid a steep 50% penalty tax. Congress granted a slight reprieve by extending the time at which you must begin RMDs to April 1 following the year you turn 72. Note that as Roth IRAs are funded with after-tax contributions, you’re never required to take minimum distributions from them.
If you work at a salaried job, your life can be pretty simple when it comes to taxes. Generally, your employer will take out the requisite taxes from your paycheck and all you’ll have to do when you file your taxes is include your W-2 information. However, as you reach retirement, you might end up dealing with a myriad of tax forms, from 1099-Rs and K-1s to 1099-INTs or SSA-1099s. Some of these may bring different tax consequences for you, so you’ll have to get up to speed on them to properly file your taxes after you retire.
Even if you’re familiar with budgeting from your working days, once you retire, your budget is likely to change, sometimes significantly. For example, many retirees have paid off their mortgages and no longer have this large housing expense. However, certain expenses, such as medical costs, are likely to rise, even if you have good insurance. Other expenses may vary depending on the lifestyle you plan to live. For example, some retirees see significantly increased travel and dining expenses, while others manage to trim these costs instead. The point is that budgets can vary greatly from person to person, but they typically change once someone reaches retirement. Be proactive and understand that your expenses may rise or fall dramatically once you retire.
No one likes to talk about the end of their lives, but it’s an essential step when it comes to financial planning. First, you should draft a will and/or trust to specify who should receive your assets when you pass. You may also want to sit with an estate attorney to discuss strategies to maximize the value of your asset transfers to heirs. From a non-financial standpoint, you should also draft instructions for end-of-life planning ahead of time, in case you become incapacitated. For example, you may want to sign an advance directive such as a durable power of attorney for healthcare, which allows someone else to make medical decisions on your behalf.
It’s likely that you’ve encountered the concept of asset allocation in your pre-retirement years, whether in a 401(k) plan or your own investment account. But as you retire, you’ll likely have to adjust the asset allocation that has hopefully served you well during your working years. In retirement, not only do you have fewer years to recover from a downturn in your investments, but you also won’t have as much income to add to your account when markets are down. As such, many financial advisors will recommend that you shift your portfolio toward more conservative investments as you age. However, every person’s financial situation is unique, so you should analyze your income, expenses and financial needs, perhaps with the assistance of a financial advisor, before you make any wholesale changes to your portfolio.
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