We spend much of our lives planning and saving for retirement. But many people don’t plan enough for what to do once they actually reach retirement. So, here’s a guide for what to do, financially and mentally, once you get there.
Retire to something: What will you do the first day you retire? If you don’t have an answer, you’re not alone. While it may seem obvious, you need to figure out what you’re going to do with your time so that you can enjoy your golden years, and make sure that you have the savings to do so.
We often think about retiring from something, but it’s more important to retire to something. When you have worked for most your life, it can be very difficult to envision yourself in a role that is not centered around your career.
Think about how you want to fill your days, with both day-to-day activities and bucket list items that bring you joy. You might decide to volunteer, travel more or work part-time.
Determine your natural pace of spending: Once you have an idea of how you want to spend time in retirement, make sure your savings cover the cost of these plans. You will need to identify a reasonable amount to withdraw from your portfolio annually without jeopardizing your financial future.
Do not just withdraw money on an as-needed basis, or you may end up draining your savings too soon. To identify your natural pace of spending, review bank statements or your checkbook from over the past year. The sum of what you spent is going to be your natural pace, which you should aim to maintain in retirement. You’ll want to have the savings and investments to cover these costs throughout retirement.
Additionally, certain costs, such as medial care, tend to go up in retirement. Don’t forget to factor in new costs that you foresee from increased care and from your retirement plans.
Increase your cash cushion: While you’re working, the general rule of thumb is that you should have enough cash to cover about three to six months of expenses. But when you retire, you’ll likely want to increase cash savings to cover between six to 12 months of expenses.
A larger cash cushion provides you with the comfort and ability to pay bills without having to worry about short term movements in the market. The exact amount that you have saved away will depend on your own risk comfort level. If you prefer a greater amount saved in cash, you may need to make the money that you do have invested work harder, since you’ll be sacrificing growth on the cash savings. Or, if you have a pension and would rather invest more of your money, you may choose to have slightly less in cash savings.
Take advantage of potential tax-efficient strategies: Depending on when you retire, you may have a golden opportunity to convert money from a traditional, tax-deferred individual retirement account (IRA) into a Roth IRA.
A Roth IRA has advantages, such as tax-free withdrawals in retirement and no required minimum distributions. But if your income reaches a certain amount, starting at $184,000 for those married filing jointly and $117,000 for single filers in 2017, you may not be able to contribute to a Roth IRA.
The good news is that even if you’re not able to contribute directly to a Roth IRA because your income is too high while you are working, you may be able to roll funds over from a traditional IRA. When considering converting traditional IRA money to your Roth IRA, take advantage of tax years when income is lower to minimize taxes, such as at retirement before you are required to take minimum distributions.
At age 70 ½, you are required to take minimum distributions from traditional IRAs. If you don’t need the money from the distributions for income, they may just provide unnecessary taxable income, and if you miss taking a distribution it can result in penalties. With a Roth IRA, you can leave money in the account past age 70 ½ without having to take required minimum distributions. The earnings can be withdrawn at your own pace, instead of the required distribution schedule. This may enable you to produce more earnings in the account that will be tax-free when they are withdrawn.
If you do retire before you are required to take minimum distributions, you may be able to convert the money to a Roth IRA at a lower tax rate. How much you can convert at a lower rate depends on several factors, including deductions and exemptions. If you transfer all the money in one year, you may be pushed into a higher tax bracket. A partial conversion, where you transfer the money over a longer period, can help you take advantage of a Roth without facing higher taxes than necessary.
Your future tax bracket, time horizon, and plans for your estate should all factor into your decision whether or not to rollover funds.
Stay on top of insurance needs: At retirement, you should review the insurance you have and make sure it is up to date and meets your current needs. The need for life insurance and disability insurance tends to drop when you reach retirement. Disability insurance can be expensive, and it often only covers someone up until age 65.
However, the need for long term care insurance, Medicare Part B and supplemental coverage increases. Medical care tends to be a significant cost in retirement. If you retire prior to eligibility for Medicare, you need to plan how you’re going to pay for medical insurance. And even if you have Medicare, it will not cover everything, so consider supplemental coverage too.
Additionally, you should update estate planning documents such as your will, power of attorney and healthcare power of attorney. Consider establishing a trust to attach a set of instructions to your assets as well. The older you get, the closer you are to needing these documents, so make sure they fit your current needs. And if you don’t already have insurance and these documents in place, get them.