Retirement doesn’t happen all at once, at least not in the way most people picture. It happens in stages, and those stages look very different from each other. But they all play into how to plan to make your money last as long as possible.
For most Americans, retirement will last for 15 to 30 years – maybe longer. And during that time, you’ll move through the three distinct phases. Your timing may be different depending on things like your physical health and family obligations, but you’ll still make your way through them. Pretty much everyone does.
Money will move differently for you in each of these phases. So each one calls for different financial moves and mindsets, along with budget and cash flow adjustments.
Phase 1: Just Retired
When you first retire, typically between ages sixty-two and seventy-five, your budget will undergo some notable changes. You’ll have to adjust to the sudden lack of a steady paycheck and make sure you take the steps necessary to cover your monthly expenses.
Depending on your age, you may apply for Social Security and Medicare. You might start pulling money from retirement accounts to beef up your cash flow. As you get used to these changes in your immediate financial situation, you’ll be able to create your actual retirement budget – hopefully not too far from your estimates – to make sure that you have what you need now without sabotaging your future needs.
A Dramatic Shift in Income
On the income side, you’ll stop getting regular paychecks from an employer. If you’re lucky, you may get regular pension payouts from an old employer.
If you’re at least 62 years old,you can apply for Social Security retirement benefits. If you’re at least age 59 1/2 you’ll be able to start pulling funds from your retirement accounts without facing any tax penalties. These two resources make up most people’s main income.
You’ll develop a withdrawal strategy and coordinate the timing of your incoming cash to make sure it meets your cash outflow needs.
And there’s another big change: Once you stop getting a paycheck, you also stop having federal, state, and local income taxes withheld. That means you’ll be responsible for making quarterly estimated tax payments to make up for that. Skipping those payments, not paying enough, or paying late can result in tax penalties and interest… and an unmanageable balance due at tax time.
Loss of Employer Health Coverage
Once you stop working or cut back on hours, you’ll need to handle your own healthcare coverage.
If you (and your spouse) are at least 65 years old, you can sign up for Medicare coverage. Before then, you’ll need to self-fund your medical care, use COBRA coverage from your former employer if it’s available, or buy a plan on the healthcare marketplace.
All of these options can be much more costly than you’d expect, especially if you’re used to premium coverage. You may also qualify for very low-cost or free coverage through Medicaid, though the requirements for that are getting tougher to meet.
COBRA (Consolidated Omnibus Budget Reconciliation Act)
If you’ve had health insurance through an employer, you may be eligible for continued coverage with the same plan under the COBRA law. That coverage can last for up to eighteen months. You will be fully responsible for paying the premiums, which may be expensive, but you will have the same exact health insurance you had before.
Spending
A lot of people move into their first phase of retirement full of plans for their free time. They travel, take up new hobbies, and spend money on things they’ve always wanted while they can enjoy them. The sudden surge of freedom, along with the realization that they’re as young and healthy as they’re ever going to be, can set off spending sprees.
There’s nothing wrong with that. In fact, it’s a smart thing to do. If you do it with a plan and don’t sacrifice current or future financial security.
This is also a time when many people consider relocating to live in a lower-cost area or to be closer to family. Both good ideas, with proper budgeting and planning, can make your retirement years easier to manage financially.
Phase 2: In the Middle
Once you’re in full-swing retirement, typically between ages 68 and 78, you’ll be more used to managing your cash flows, both in and out. This is the time to take a critical look at your portfolio and revisit your asset allocation, meaning your choices about how much to invest in different types of assets, such as stocks, bonds, and real estate.
During this phase, many people start to reduce their Phase 1 activities—they’ve traveled everywhere they wanted to go, for example. It’s also a time when new health concerns start cropping up. These two factors can lead to a big shift in monthly expenses: Lower activity levels will reduce costs, while increasing healthcare needs will bring on different costs.
On top of making some financial tweaks, this is a great time to revisit your estate plan and update legal documents to make sure your current wishes are clearly communicated. If you don’t have these documents sorted already, do it now.
This includes:
- updating beneficiaries on bank, investment, and retirement accounts
- writing a will
- putting a living will/healthcare proxy in place
- initiating any powers of attorney (POAs) that you’d need if something dire happened
Shifts in Cash Flow
This middle phase of retirement involves an important “must.” You must start taking required minimum distributions (RMDs) from your traditional retirement accounts once you reach age 73 (75 beginning in 2033). If not, you’ll pay IRS penalties on the amount you should have taken. This does not apply to Roth accounts.
And while it’s not technically a “must,” start taking Social Security by the time you turn 70. There’s no benefit to delaying past then. At age 70, you’ll receive the highest benefit possible. And you won’t get back pay if you do wait, so you’ll just miss out on getting paid.
This phase will also involve changes in the way you spend money. It’s a more laid-back phase, where travel might be limited to visiting family, and your activities will take place closer to home. That can free up some money in your budget, allowing you to withdraw less cash – but not less than your RMDs –from your retirement nest egg.
Get Your Documents in Order
If you don’t already have a will, a living will or other advance directive, and other estate-planning documents in place, or if you haven’t reviewed them in the past few years, this is the time to take care of that.
Get your estate plan in order to make sure that your assets are handled the way you want them to be once you pass away. While you’re still of sound mind, designate a financial power of attorney to manage your money if you become unable to do it yourself.
Review all of your beneficiaries on all of your accounts. If you haven’t made your bank accounts POD (payable on death) and your investment accounts TOD (transfer on death), do that now too. It removes the probate lag for your beneficiaries, so they’ll have access to those resources right away.
You’ll also want to give someone your healthcare power of attorney to make medical decisions on your behalf according to what you’ve indicated in your advance directive.This only kicks in if you’re unable to make those decisions on your own.
Power of Attorney
A power of attorney (POA) is a legal document that gives someone else the authority to act as you in specific situations. When you sign a POA, give your chosen agent the legal right to make decisions on your behalf, and this may involve accessing all your money and assets. That’s why it’s imperative that you only give a POA to someone you can trust 100 percent. While you’re able to communicate, you can revoke a POA at any time.
Phase 3: The Later Years
The later years of retirement may be marked by dramatic changes in your health and living situation. Medical spending tends to be the highest during this phase and may put a significant strain on your budget.
Fears of running out of money can fill this phase with anxiety. Taking steps to increase cash inflows, decrease cash outflows, and add an extra layer of security helps reduce those anxiety levels.
Managing Medical Expenses
If you haven’t had significant health issues before, you may not have paid too much attention to your Medicare plans. You can change that now and find the right combination of Medicare coverage to meet your healthcare needs and slow down the drain on your nest egg.
If you have any funds remaining in a health savings account (HSA), you can use them now without any tax hit.
Focus on Preservation
At this point in your retirement, it’s best to focus your portfolio mainly on preservation and income production. Reducing risk will lower your investment returns, but it will also protect your nest egg from stock market losses and economic shocks when you may not have enough time for conditions to rebound. Shifting out of riskier investments and into more stable securities will add another layer of financial security.
Another option is to buy an immediate, fixed annuity. This is a bare-bones annuity that acts like a pension, supplying guaranteed periodic payments for life. You can choose from a variety of timelines such as ten-year minimum, joint life for you and your spouse, or your lifespan to fit your situation. You don’t need to get the bells & whistles annuities that come with huge costs and confusing add-ons. Stick with a straightforward policy that gives you a steady paycheck.
There Is a Lot to Think About When You’re Getting Ready to Retire
Having someone who understands how all of this works and who can guide you through these decisions really helps.
That’s why I offer retirement planning coaching sessions for people at every stage, whether you’re just starting to plan your retirement, you’re getting ready to retire, or you’re well into retirement and want to shore things up.
During these 1-hour coaching sessions, we’ll discuss where you are currently, what you want your future to look like, and how to plan, so you can make that future happen.
We’ll look at all the different factors like:
- How much you have saved for retirement right now
- How much you’re likely to get each month from Social Security
- What your medical expenses may be and your best options to pay for them
- What your retirement budget may look like in each of these phases
- Investment options to grow your retirement savings
Then you’ll be able to plan for your future, or your current, retirement life with more confidence.
Click on the button below to schedule your retirement planning coaching session now.