Finances in Retirement - Investments

Preparing for Post-Retirement

by Alli Thomas

Mar 20, 2023

You’ve finally made it! You’ve picked a retirement date and can’t wait to start traveling, trying new hobbies, or getting around to working on home projects you’ve been putting off during your working years. But have you made the necessary preparations for post-retirement to avoid having financial issues?

If you haven’t mapped out your budget and taken into account costs and taxes, instead of exciting, post-retirement can become expensive and unpleasant quickly.

Post-Retirement Preparations

Here are four tips to keep in mind while you’re figuring out what your retirement “paycheck” should look like and what lifestyle you can afford:

1. Solidify your budget in advance.

You won’t know how much you’ll need to live in post-retirement until you know what you’re spending. Many experts recommend drawing up a preliminary retirement budget a few years before retiring (for example, once you have your expected retirement age established) and sticking to it as best you can.

That way, by the time you retire, you’ll have a better idea of what your spending will look like and can make adjustments as needed. Keep in mind that some things, like healthcare costs, will change after retirement.

2. Understand the sources of income that are available

You should have a plan for how much you should withdraw each year from each source and the best order in which to tap them. You also will have to make a decision as to what age you will start receiving Social Security payments.

Most people will be relying on some or all of the following: Social Security, a pension or a 401(k), an IRA (traditional or Roth), and bank savings. There could also be other sources of income, such as disability benefits or post-retirement employment. The mix of accounts you withdraw from can have a significant impact on your tax bill.

Figuring out the best way to maximize your retirement income and how much to withdraw each year is a critical component of your post-retirement financial plan. If you withdraw too much from your retirement investments, for example, you may have to pay IRMAA — a high-income surcharge on your Medicare health insurance benefits.

3. Plan for tax bills

Unless your assets are entirely in a Roth IRA, you may be in for a shock if you start taking large withdrawals from your retirement accounts. A good rule of thumb is to have 20% to 25% of your total withdrawal amount withheld for Federal income taxes. If your budget requires an $8,000 net monthly withdrawal, “gross up” that amount by $1,600 to $2,000 to account for taxes (in other words, change your total withdrawal amount to $9,600 to $10,000 each month).

Also, remember that you may owe taxes on your Social Security benefits, depending on your total income (for Federal income tax) and where you live (for state income tax).

4. Account for health care costs

Depending on your pre-retirement health care arrangement, your healthcare costs could increase significantly after you turn 65 and sign up for Medicare (you can actually enroll three months before your 65th birthday).

Medicare premiums can be significantly higher for high-income retirees than low-income ones and, as mentioned above, you may face penalties if you don’t enroll on time, so you want to account for these in your budget and drawdown plan.

Get a Comprehensive Retirement Plan to Reduce Stress

These are just a few of the many considerations you’ll have to face when you first retire, which could make the transition to post-retirement quite stressful. There are many details and variables to take into account that you may not have the time to handle effectively or may not consider when preparing on your own.

This why working with professional advisor experienced in investment planning, Social Security, and taxes to get a comprehensive retirement plan created in advance can get you better set up for retirement success.

Request a no-cost, no-obligation advisor consultation today!

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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