The ability to maintain your lifestyle in retirement in a satisfying and fulfilling way is one of the biggest concerns for pre-retirees. The key to achieving financial comfort in retirement is to have a clear understanding of your financial resources and the demands on these resources both now and in the future.
Consider the following five steps to help create peace of mind during your retirement years.
Create a cash flow blueprint. A common rule of thumb when creating a retirement budget is assuming you will need 70 to 80 percent of your pre-retirement income. However, this assumption fails to illustrate what you really spend and how your spending may change over time. To get a realistic picture of what you will likely spend in retirement, you should create a budget based on your current spending habits. There are many free or low-cost online resources available that help you automate expense tracking, like Mint.com and Quicken.
[See: 10 Tips to Boost Your IRA Balance.]
Next, you should think about expenses that will change over time, such as travel and entertainment expenses, as well as non-recurring expenses like car purchases or home maintenance projects. Taxes are also important to consider when budgeting, especially for high-net-worth individuals. Income taxes tend to decrease early in retirement, but often rise significantly when it comes time to take required minimum distributions from their retirement accounts.
Plan for higher health care costs. A common misconception among retirees is that Medicare will cover most health care costs during retirement. While Medicare is designed to cover many health-related expenses, it does not cover long-term care costs (nor other smaller expenses like dental care or hearing aids). A prolonged health event could significantly derail your retirement plan.
It is important to run scenarios to understand the impact a prolonged negative health event could have on your retirement savings. Consider long-term care insurance to protect against a prolonged health event. Remember, the earlier you purchase long-term care insurance, the more likely you are to qualify at a lower cost.
Minimize financial support to friends and family. Many financial plans have become derailed due to unanticipated “loans” to friends and family. While it can be difficult to turn down a request from a loved one, lending money is a gamble, so avoid using cash you know you’ll need in the future. If you can answer the request with the mindset that you will never see the money again, then you should be fine. However, keep in mind that these solicitations typically are not a one-time request. It is a good idea to establish a policy for lending money and stick to it. This will help you feel less apt to comply with the request and relieve the awkward feeling of the situation.
[See: The Best ETFs Retirees Can Buy.]
Monitor and update your financial plan. Planning is an evolving process. Changes to financial markets, tax rates and your personal assumptions will occur. An ongoing review with a financial advisor is vital to make sure that you remain on track.
Create multiple investment portfolios to align with specific objectives. Creating separate investment portfolios that align with specific objectives, or buckets, such as lifestyle, current spending, or vacation, helps establish a suitable investment objective. These buckets often have different time frames and risk tolerances. For example, the vacation and current spending buckets will be shorter term and should be invested in a manner that does not take much risk, versus your lifestyle bucket, which will need to grow and keep pace with inflation.
Creating separate buckets accomplishes several key items:
— You don’t take too much risk such as investing in a stock fund with the short-term bucket, which should not be subject to much market volatility.
— During periods of market volatility, you are not pulling assets from the bucket that has a longer-term objective, giving the portfolio time to rebound from a negative market.
— The buckets serve as a reminder that you have set aside funds to accomplish your goals, giving you the permission that savers often need to spend their money, which leads to a more meaningful retirement.
[See: 8 Things Not to Hide From Your Investment Professional.]
Balance is key when it comes to successful retirement planning. Keeping a clear understanding of your current financial resources and your goals for the future are key to maintaining your lifestyle in retirement.
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5 Steps to Maintaining Lifestyle in Retirement originally appeared on usnews.com
