Some Healthy Financial Habits in Retirement
By Michael D. Bird, CFP®, MBA
Many people look fondly to retirement, but most don’t plan for it. Think you are different? Several years ago, The American College tested the knowledge of those age 60 to 75 and 20% passed. Worse, the average score was 42% (see how you do by looking up The American College 2014 RICP Survey). Learning about retirement accounts, Medicare, and Social Security will help you prepare. And that’s a good habit to get into now. What are some other habits that will help you in retirement?
Start thinking about what you want to do in retirement and then live within your means. That’s because what you do will give you an idea of how much money you will need. For example, travel may be important, but is it overseas travel by plane? Or will you drive around the United States in your own car? Will you stay in hotels, or will you have a recreational vehicle? The answers to these questions will help you figure out the dollars needed. Another way to look at it is to decide on a monthly amount and then have a spending plan to help you live within your income. Retirement is different in that you no longer have increasing income or the potential for another higher-paying job. So, learning to live with a plan is a great habit to develop now and in retirement.
Develop the habit of “free.” There are so many things that have little or no cost, and yet many people ignore or simply walk past. There is a reason that the phrase “the best things in life are free” continues to ring true. It doesn’t cost anything to appreciate a beautiful sunset or to spend time in the library. Mountain hikes can be free, but walking around your neighborhood is definitely without a cost. What are some things that you enjoy that have little or no cost?
Look for ways to reduce your taxes and spending. By making a game of it, many people find that the expenses before retirement don’t make any sense after retirement. Keep an eye out for unnecessary expenses. For example, your home may be too big for your needs now. Or you may want to live closer to grandchildren and that’s a good time to look for less expensive areas to live. Ideally, you reduce your monthly expenses to less than what you receive from Social Security or your other fixed income. That’s what we call your basic needs money. Everything beyond that would be a want and can more easily be planned for. With the recent tax reform, the standard deduction is almost double the amount from before and that might make your mortgage interest deduction meaningless.
Recognize the tax consequences of retiring and taking distributions from your retirement accounts. Many savers are surprised to find out that at age 70, their distributions are going to cost them much more in taxes. It’s because they have saved so much in their retirement accounts and when they have to distribute some of that money, it causes their tax rate to go up and thus, their tax bill. One way to fix that is to consider distributions before turning 70, but, and this is important, after retiring.
Get in the exercise habit. You don’t have to wait for retirement to start moving, but if you have, follow your doctor’s orders and then get active. It’s amazing the opportunities we have in our area, whether in the mountains, streams, trails, roads, pools, and gyms. Keep moving!
Get in the habit of sharing all of your financial affairs with your spouse. Most of us settle into responsibilities and our spouse may or may not know what’s going on. Sometimes it’s a real challenge to find things in the kitchen when my wife goes out of town because her kitchen organization is different from mine. Make sure both of you know how to handle all of your financial affairs. And if one of you is the investment “specialist,” make sure that the other knows what to do in case of incapacitation, or death.
Finally, review your retirement income plan every 6 months. Life changes, the investment world changes, and the whole world could look different from your perspective. Make sure you stay on track. Even an airplane on autopilot makes continual changes because of the winds, speed, etc. You need to adjust, too, so that your retirement destination is what you imagined.
Retirement is not the same as when you were working. In some ways your risks have increased because now you have more assets and mistakes can be costly. Developing good habits now, and in retirement will make you healthier, in many ways.
Michael Bird, a Financial Advisor with Secure Money Masters in Bristol, TN, is also an adjunct Professor of Finance and has taught at several universities and colleges, including ETSU, Belhaven College and the University of Memphis. He currently teaches a course on Social Security and how to integrate Social Security benefits with Retirement Income.
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