Many steps are required to get ready to retire—saving enough money in the most tax-advantaged accounts, determining where you’ll live out your life, doing your estate and tax planning, and much, much more. But all of that only gets you to the finish line, where you leave the work world behind. Starting on day one of your retirement, it will hit you: Now you have to make sure you’re able to achieve and maintain your goals for the rest of your life.
What’s the secret to accomplishing that? Keeping your goals front and center, creating an action plan for achieving them, and reviewing that plan regularly throughout retirement can help you keep your finances on solid ground.
Your Retirement Dreams
Pre-retirement, workers say they want to travel, spend more time with family and friends, pursue hobbies, and do volunteer work, according to a 2020 Transamerica Center for Retirement Studies survey on retirement security.
Your personal vision may feature these or other goals, but regardless of what you want to accomplish, the beginning of retirement is not the time to take your foot off the gas when it comes to the financial strategy for the rest of your life.
“For many, going into retirement after years of planning and saving can give them the feeling of satisfaction that they’ve done enough, so now, ‘let’s enjoy,’ ” says Stuart Chamberlin, president and founder of Chamberlin Financial in Boca Raton, Fla. “But this mindset can have a detrimental effect on their financial security.”
On the other hand, focusing solely on financial stability can have its own drawbacks. You may realize that finding a happy medium between obsessing over and neglecting your finances will serve you well as you approach retirement.
“I often find that retirees are so stressed about the decisions they’re making because they have this idea of retirement being a binary switch between accumulating assets and distributing them,” says Cody Garrett, CFP, financial planner and educator at Measure Twice Financial in Houston. “They believe that they’ve been going uphill their whole life, and now they’re starting to go downhill.”
Andrew Wang, managing partner at Runnymede Capital Management in Mendham, N.J., agrees. He stresses to his clients the importance of adapting their plan around the natural and gratifying progression of their life in order to lead an emotionally fulfilling and financially secure retirement.
How to Plan for a Big Life Transition
Your financial picture changes with any big life transition, and retirement is one of the biggest. One change you’ll contend with: switching from a regular paycheck to managing required minimum distributions from tax-advantaged retirement accounts. You’ll also need to make sure your income stream and expenses match up or you’ll have to make adjustments.
Add in navigating Medicare, and dealing with Social Security planning, inflation, and market volatility, and you’ve got a complex picture. So you’ll want to make sure there’s some wiggle room in your budget, which can be successfully achieved through savings and low-risk investments.
“Bonds are very important as a source of low-risk retirement income,” says Wang. “The bond can reduce volatility significantly in an investment portfolio so that people can weather financial storms.”
Crucially, retirees and prospective retirees must cope with the uncertainty of markets not only financially but also emotionally.
“We must give ourselves grace to adapt without judgment, especially for the events that we know are out of our control, such as changes in inflation, interest rates, tax legislation, market returns,” Garrett says about regulating emotions in money management. “We should focus on having compassion for our past and intentionally move forward without letting former judgments blind future decisions.”
Use the ‘Asset Bucket’ Approach
As you move from saving for retirement to spending as a retiree, one smart strategy is to divvy up your assets. David Zavarelli, CFP, an independent financial advisor based in Danbury, Conn., says splitting assets into individual “buckets” can help you better plan your spending.
“The first bucket is your short-term, which is two years or less,” Zavarelli explains. “That money should be in cash or very short-term bond investments.” The middle one is your three- to six-year bucket, which you will probably want to invest in a portfolio with a 50/50 split between stocks and bonds. “This bucket will periodically replenish the short-term cash needs bucket,” he says. The third bucket is long-term, which may have more stock exposure, potentially allowing for more growth. “Since it’s intended to be longer-term, there’s less concern about short-term market volatility,” Zavarelli says.
Match Your Goals to Your Buckets
Once you’ve set up your buckets for spending, you can then decide which of your goals each one will fund. For example, part of your short-term bucket may be earmarked for emergency expenses. On average, baby boomers, have only $15,000 in their emergency fund, according to the Transamerica Center survey.
Important: Keeping a liquid savings account with three months to a year’s worth of funds in it can help you cover any unexpected costs you might encounter.
The middle bucket could be what you draw on to fund your lifestyle goals, such as starting a new business or traveling more often. Reviewing your assets, income, savings rate, and investment returns can help you determine how much you can afford to spend on travel and where that money will come from.
The third bucket can be helpful in planning for what can easily be your biggest retirement expense: healthcare. A couple retiring at age 65 in 2023 will need roughly $315,000 to pay for medical expenses during their retirement, according to the Fidelity Retire Health Care Cost Estimate. And that figure doesn’t include the additional cost of long-term care.
Some estimates run much higher. According to HealthView Services, which does healthcare-cost projections for the financial services industry, a healthy 65-year-old couple retiring in the U.S. in 2023 will need about $662,156 to cover healthcare expenses during retirement.
Prioritize Your Needs, but Don’t Forget Your Wants and Dreams
As you shape your financial plan in retirement, it’s important to figure out what constitutes spending necessities (in terms of meeting basic living needs) versus “wants” that aren’t necessarily critical to daily survival versus “dreams,” says Florida-based certified financial planner Ilene Davis.
Then, do the math. “Figure out how much is needed for each and set aside that much for that purpose,” Davis says. Leave room for new needs that may arise as you move through retirement, such as healthcare. Most important, remain realistic.
“Many people think they need more than they really do,” Davis adds. “It’s a matter of truly understanding what lifestyle they can afford and finding happiness to enjoy that desired lifestyle.”
If there’s a gap between your savings, income, and goals, think about how you can close it. That could mean reducing overall spending, delaying retirement, or working part-time once you’ve officially retired. All three could help to bolster your savings and increase retirement income.
2022 Retirement Savings of Non-Retirees in the U.S.
While many people are saving for retirement, fewer are confident that they will have enough to last, including many who are older than 60.
Retirement can mean uncertainty if you haven’t taken steps to plan for it appropriately. If you’re retired or are nearing retirement, it’s important to keep your goals—and your plan to achieve them—firmly in sight.
“The most important step a retiree or pre-retiree can take is to educate themselves on the intricacies of building a concise financial plan,” Zavarelli says.
An advisor can guide you through the process if you’re not sure where to start. While you’ll pay a fee for professional advice, “the investment up front can save you far more down the road and provide you with the peace of mind that can allow someone to enjoy the retirement they deserve,” Zavarelli adds.
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