After decades of saving to retire, many Americans are excited to finally quit work and enjoy their free time.
But for some, switching to a spending mindset can be a difficult transition after focusing on saving.
“There are many unknowns and if there isn’t detailed planning or a high-level overview, someone with a lot of stress and anxiety can retire,” said Anjali Jariwala, Certified Financial Planner, CPA, and Founder of FIT Advisors in Torrance, California.
Many retirees do not want to spend all of their assets. Instead, they want to keep them in retirement or even grow them. According to an April study by the Employee Benefit Research Institute, nearly 47% said they plan not to spend any or a small portion of their account. The group surveyed 2,000 households aged 65 to 72 with financial assets of less than $ 1 million.
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“People are trying to keep their money because it makes them feel safer to see a bunch of money,” said Steve Vernon, a consulting research scientist at the Stanford Center of Longevity. “I like to call it Scrooge-McDuck syndrome.”
About 40% expected to spend all or a significant portion of their assets in retirement, and about 14% wanted to expand their accounts during that period.
Of course, having money to spare after death isn’t necessarily a bad thing – some people, for example, may want to leave an inheritance to their family members. On the other hand, you can miss out on retirement if you don’t have a spending plan tailored to your needs.
That is what financial planners recommend.
Start with what you have
In the years leading up to your retirement, first find out what money you will have to have when you stop working.
“As someone nears retirement, they should thoroughly examine all of their accounts and make sure they are paying attention to whatever is out there,” Jariwala said, adding that this includes retirement accounts such as individual retirement accounts, 401 (k). Plans, pensions and social security.
Larger assets like real estate should also be included, according to Vernon, as they can also be used for retirement.
Determine a spending plan
Once you have a good idea of the money you need to spend, take a look at where you are spending money now and determine how you want that to shift or stay the same in retirement, said Diahann Lassus, CFP and executive director Director of Peapack Private Wealth Management in New Providence, New Jersey.
“That doesn’t mean you have to get caught up in the weeds to hate it; it means you need to understand the bigger categories of where your dollars are going, ”she said.
Many expect their spending to decrease in retirement – some plan for about 80% of their pre-retirement spending – but that’s not always the case, Lassus said. For those who are retiring early, spending may stay the same as they have more time to spend on activities they enjoy, such as travel.
It’s also important to include a fund for rainy days, as well as money for long-term care, the cost of which can increase with age.
Additionally, people should find places to cut their budget on retirement. For many, housing is the biggest cost and one of the easiest to cut costs when moving to a state with lower taxes or downsizing.
Set up a process for dragging accounts
Once you know your retirement budget, it makes sense to set up withdrawals from different accounts to comfortably cover your expenses.
“I’ve always liked the idea of setting up paychecks for the rest of my life and then just paying the paychecks out every month,” Vernon said. “It’s about how much you can spend and feel safe.”
Making strategic decisions about what funds to draw from which accounts will help keep some assets growing to protect against changes in your spending plan or things like inflation that has risen.
“The more you can plan and have everything sketched out, the more comfortable someone will feel,” said Jariwala. This includes taking into account the historically low tax rate, the potential for market volatility, the accounts set up for regular withdrawals, and when you can start tapping into them.
For example, some accounts like Annuities or Annuities have fixed amounts that you receive over time. While this will help you budget, the value of those payments will be eroded by inflation. Other benefits, such as social security, increase and therefore will increase with inflation, and it makes sense to wait before using them.
That means many will have a gap between retirement and getting social security, which means they will likely have to resort to other assets like 401 (k) or IRA first.
It can take a few years to prepare for a pension plan that is right for you. This is especially true for those who will retire during or near the pandemic, as well as those who will be younger and more active when they retire.
“This year it’s like, ‘Oh, I can do it, it’s really easy, I just didn’t spend anything,'” Lassus said, adding that spending will go up for most post-pandemics.
People should continue to check with their spending plans and financial experts as they work with them to make sure they are on the right track in retirement and make adjustments as necessary. Jariwala recommends making an overview at least once a year, if not more.
Regular check-ins can help you make important financial decisions – like moving house – if you retire earlier than your 80s, Jariwala said.
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