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Retirement Articles › Retirement Plans › Does Retirement Planning Stop Once You Retire?

Does Retirement Planning Stop Once You Retire?

August 28, 2020
Retirement Planning Insights
493
7 Min Read

Retirement is a very important chapter of life. Hence, people strive hard by budgeting, saving, and investing for these non-working years. Some people also tend to get complacent with this strategy and often think that they have done their part to enjoy the golden years of their life. But such an approach can have a detrimental impact on your financial security.

The most critical aspect of retirement planning begins only upon retirement. An average American spends almost 20 years in retirement. This is a phase where all planning and strategizing are finally applied to practical use. Thus, the questions are no more limited to which stocks and bonds should form your portfolio, instead, other critical additions, like the usage of funds, Social Security benefits, budgeting, retirement account withdrawals, etc. require more focus.

If you are wondering whether retirement planning stops once you retire, here are some tips that can help you secure your finances in your non-working years:

Split your assets

A major difference between the pre-and post-retirement phase is the shift from saving to spending. So, where earlier, your investment approach, budget plans, spending habits, etc. were more centered on maximizing savings, the strategy will change drastically post-retirement. In the post-retirement phase, your plan should involve investing and budgeting to spend your wealth prudently. This is important to ensure that you do not outlive your assets. An important step in this regard is to divide your assets. Splitting the assets into three categories – short-term, mid-term, and long-term – can help you to plan your expenditure and stay within a budget while simultaneously securing enough for the future.

Your short-term bracket of assets could comprise of immediate cash and cash equivalents, such as short-term bonds. The basic goal of this approach is to have a sufficient influx of money for 2 years or less. For the mid-term bucket, it is advisable to have semi-liquid assets. You could consider a 50-50 distribution into equity and bonds. Where equity can maximize portfolio returns and bonds can offer a more consistent source of income. The agenda of a mid-term bucket is to suffice for at least 3-6 years of expenses. Lastly, the long-term bracket should include assets with long-term maturity. Moreover, you can invest more in stocks that offer higher rewards at considerable risk. The long-term bucket approach also aims to shield you from short-term market volatility.

Set goals for each asset category

Once you have categorized your assets, it is good to link them with a specific goal. Each bracket can have a goal, in terms of its usage. For instance, the short-term category is ideally a reserve for general expenses. That said, a part of the short-term bucket should also be set aside as an emergency fund. As per recommendations, the contingency fund should constitute anywhere between 3 months to a year of expenses. These will enable you to adequately cover all unexpected expenses.

The second category of assets can finance major goals like building a home, establishing a business, traveling, covering for a child’s marriage costs, and others. It is important to timely review these assets to understand their returns and streamline probable expenses. The last bucket comprising long-term and riskier assets can fund the most demanding expenses, including healthcare costs. As you age, you would need more financial help to absorb medical expenses, unexpected health emergencies, and similar costs. Money spent on healthcare can cause a considerable dent in your savings. They also consume a large share of your retirement budget. Hence, it is good to keep the value of the third bucket in line with such expenses. According to research, 15% of the yearly funds of a retiree are used for healthcare-related purposes. As per estimates, in 2020, a retired couple aged 65 would need $295,000 to cover their healthcare expenses. Hence, the third bracket of assets would adequately support healthcare and related expenses.

Prioritize your expenses

Once the assets have been categorized for financial security, the next step is to prioritize expenses. Understandably, these are the golden years of life and you would want to fulfill all your dreams and desires. But it is critical to understand that only proper planning can help meet such wants. While you allocate funds according to major retirement expenses, it is also advisable to distinguish discretionary and non-discretionary expenses. Discretionary costs are not essential for daily survival, and are related to occasional desires and wants, such as traveling, investing, etc. Non-discretionary expenses support survival and help to meet basic needs, including food, clothing, medical expenses, etc. It is beneficial to eliminate all unnecessary expenses, like oversized living arrangements, luxury purchases, etc.

After prioritization, you can estimate the amount required for each category and set aside funds from each of the three buckets. It is better to be as realistic as possible in making these estimations and arrangements. Further, if there is any shortage of funds, you can revisit your budget, cut your spending, delay your retirement, or take up a temporary job. This could help bolster your retirement income and bridge the gap between your income and goals. It is advisable to maintain a savings routine even in retirement to ensure that your funds last for as long you live.

Be pragmatic about investments and withdrawals

An essential tip to consider while living off your retirement income is to make rational investments and schedule systematic withdrawals to maximize gains. Ideally, as the retirement age approaches, you should shift your portfolio investments into more conservative assets, like bonds and other secure market tools. These instruments offer a stable income with minimum risk, unlike equities/stocks. Moreover, you could consider investing in annuities for a regular income source in retirement. Annuities are a type of insurance tool that endow you with fixed annual sums for a number of years. You could choose a deferred annuity with an in-built income rider for assurance of a fixed, lifetime income stream. Additionally, the increasing payout feature can help accommodate inflation over time.

It is also necessary to pay attention to the withdrawal of funds from retirement savings accounts, such as a 401(k) account, an IRA (Individual Retirement Account), etc. As of 2019, a person younger than 59.5 years has to pay a 10% penalty on withdrawals made from a 401(k) account. In addition to this, normal income taxes are also levied on the funds withdrawn.

Furthermore, you can get a professional consultation to delay your Social Security benefits and maximize your share. Legally, Social Security benefits can be withdrawn from the age of 62. But keeping money in this account for longer will improve your returns. For example, a person who withdraws Social Security benefits at the age of 68 (one year later than the official retirement age), will get returns equivalent to 108% of the monthly benefit. An average retiree can add more than 50% to the cheque if the withdrawals are delayed until the age of 70.

To sum it up

Financial planning is an ongoing process that never stops. These steps can support you in adopting a holistic approach to retirement planning. It is important to timely assess where you stand, determine your goals, and analyze what needs to be done to stay on track for the future. If you are confused about where to start, you can rely on professional Financial Advisors for comprehensive retirement planning guidance.

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