Life Does Not Get Cheaper in Retirement

life does not get cheaper in retirement

“In my experience, clients are often surprised to find that their expenses do not go down after retiring, and some new budget realities need to be included in the plan,” Briboneria says. After retirement, unless you pay off an outstanding mortgage, your regular living expenses will stay at about the same level. Travel is often one of the big plans during retirement, and those expenses need to be added into your budget. Another expense that can be a surprise if not planned for is taxes. During your working years, your employer took taxes out of your pay before you saw your paycheck. In retirement, you will be responsible for writing the checks to pay your taxes, so money for this expense also needs to be in your budget.
 

Analyze Your Views Concerning Retirement Assets

You have been setting aside money for years into your IRAs, 401(k) account or your brokerage or mutual fund accounts, with all of that money earmarked for retirement. When you get into retirement, you get to start tapping that money to pay for your new lifestyle. “Large retirement account balances can make the new retiree feel rich,” says Briboneria. “However, someone planning for retirement needs to make a decision how those large amounts of money will be treated – as a ready source of cash to spend or to be stretched out to make sure the money lasts as long as it is needed.” Quickly spending a portion of your retirement savings is not necessarily wrong – it is your money, after all – but it is important to understand the consequences of doing so in the context of your overall retirement income, now and 20 to 30 years in the future.

Taxes Work Much Differently in Retirement

While you were working, you paid income taxes on your earnings and socked away money in your retirement accounts as a way to reduce those taxes as well as save for retirement. After you retire, your tax situation will be very different. To minimize the taxes you pay, you need to find out the tax rate you pay for each type of income you will be receiving and if you take withdrawals from your accounts. “Tax rates can vary widely,” notes Briboneria. “You may pay 28 percent on withdrawals from your 401(k) balance, 15 percent capital gains if you sell stocks in your brokerage account or zero percent if you withdraw from a Roth IRA.” As a result of the different potential taxes, you need to plan out for a period of years from what accounts you will draw money to cover your retirement needs, with a goal of minimizing your total tax burden over that period of time.

Couples Must Plan Together

“I find that the two sides of a couple often have a different view of how their personal finances will work in retirement,” says Briboneria. “Many couples find it difficult to discuss their finances, but they probably cannot reach a plan that will work without discussion and understanding.” Problems between retired couples can arise when each partner has a different view on how the retirement savings assets should be spent or saved for later years. A big point of planning together is for each person to become aware of how the other views money, spending and budgets. If you have not had this discussion as a couple, the retirement planning process is when this discussion is necessary to make sure your golden years live up to the term.

Emergency Fund Has Different Function

Briboneria recommends that you set aside an emergency fund of six to 12 months of expenses in a readily accessible account. “In retirement, the emergency fund serves a different purpose,” she notes, “This is where you get the money if your investments suffer a large, but hopefully temporary drop in value.” You can draw from your emergency fund while you wait for the stock and/or bond markets to recover some of the lost value; that way, you are not forced to sell shares when the prices are low. An emergency fund allows you to control your cash flow and maintain your lifestyle through the ups and downs of the financial markets after you stop working.