I am retired. Now what?

Having stopped working, you also have stopped earning your regular salary. So, you turn to your savings, retirement plans and other sources to support your needs.

For certain individuals, these sources of retirement funds may be enough, for others it may not be the case. Whatever is the situation you are in right now, you need to plan and manage well the financial aspect of your life as a retiree.

1. Know how you will live your life in retirement

This first step is crucial, as it would dictate how you use your resources to support the kind of lifestyle you want to live.

Would you be traveling a lot? Do you plan to work part-time? Any hobbies you want to give your attention to? Would you require medical care during retirement? Do you plan to live in a smaller home, or move elsewhere?

Some of these questions may have already been answered prior to retirement. The important thing is to get a clearer picture of how your life would be after you retire.

2. Know what resources will be at your disposal

You might have a mixture of sources like Social Security benefits, savings, pension, income from retirement funds, rental income, royalty payments, etc. You might also be doing consulting services.

Establish how much income you get in a year, which sources pay you out monthly, quarterly or yearly. 

3. Have a financial plan

Now that you have established what your retirement lifestyle would be and what resources you have to finance that lifestyle, your next important step is to have a financial plan in place.

Why is a plan important? Because it is way of managing risks so that you avoid running out of money during retirement. The next steps detail the key components of a good financial plan.

4. Optimizing tax benefits

A key feature of a financial plan is how you plan to manage your retirement accounts. Generally, retirees have accounts that can be classified into three: taxable, tax-free and tax-deferred. In step number two, you made an inventory of your resources from which you plan to draw your retirement funds. Knowing where each resource or account falls among the three categories is crucial. To help you go about:

  • Taxable - this refers to accounts where you are supposed to shoulder ordinary income tax every year on the interest earned and on non-qualified dividends. This also covers capital gains taxes assessed on appreciated securities sold and on qualified dividends.
  • Tax-Free - earnings of and contributions withdrawn from certain accounts like Roth IRAs, 457 plans may be tax-free provided certain conditions are met.
  • Tax-Deferred - contributions made to Traditional IRAs, 401(k)s and 403(b)s are not subject to income tax in the year the contribution was made. However, withdrawals and earnings of these accounts may be taxed later on.

Knowing the nature of your accounts will help you minimize the amount of taxes you pay in a certain year. This would also allow you to maximize your benefits from tax-free and tax-deferred accounts.

5. The 4 percent rule

Next, you need to consider the 4 percent rule. This rule is advocated by many finance specialists. In essence, the rule calls for you to set the maximum amount you withdraw from all your retirement accounts in your first year to 4 percent.

Here is how it works: suppose you have a million dollars as your retirement fund. You use 4 percent of this for the first year you are retired, hence, $40,000. In the next year you may increase this, usually by three percent, hence you spend $41,200 for the succeeding year. This rule is important because many retirees usually overspend their savings in their first year of retirement.

Another key feature of your financial plan is the sequence of your withdrawals from your accounts. This has major impact in the after-tax money you will get along with the lifespan of our funds. Consider the following as a guide:

  • Retirees who fall below 70 and a half, should consider selling investments in their taxable accounts first. This would mean they still have assets in their tax-deferred accounts allowing them to fully take advantage of the benefits of tax-deferred growth.
  • Retirees who are older than 70 and a half should start withdrawing from their Traditional IRAs and employer retirement plans otherwise they will face a tax penalty. Withdrawal amounts should follow the Required Minimum Distributions determined by the IRS.
  • If the amount that a retiree requires is larger than the RMDs, then he may decide to take the additional amount needed from his taxable accounts. The benefit here is that the tax-deferred benefits remain in place to allow for optimal growth.
  • The next consideration is the tax-deferred funds. Married retirees should begin by first making withdrawals from the older spouse's accounts. Again, the reason for this is to optimize the tax-deferred benefits available.
  • The last that should be considered are withdrawals from Roth IRA accounts. Remember, this has tax-free benefits which can be maximized by leaving it untouched the longest. This would come in handy in the later period of retirement when long-term care and medical expenses come into fore.

6. Monitoring your expenses

Another key feature of a good financial plan is monitoring of expenses. You have established a way to time your withdrawals now it is time you include in the plan a way to watch your expenses. This will enable you to compare the amount of income you generate and the amount you spend following the lifestyle you selected.

Not too many retirees can safely say that their retirement income exceeds their expenses considerably. In many cases, there would be a gap between the two as income generated would be insufficient to meet expenses.

7. Adding to your income or managing the gap

There are many ways to close the gap between expenses and income. The following are examples:

  • Work part-time - this is a reality for many retirees because of the income - expenses gap. However, many also do this because they enjoy their job or prefer to keep themselves busy even in retirement. Whatever is the reason, working allows a retiree to have a stream of income.
  • Turn you hobby into a job - Perhaps you are good at golf, tennis or other popular sports. You can turn your knowledge of the game into a source of income by offering your services to parents who want their children to be trained or coached in the sport. Other hobbies that can be taken advantage of include expertise in computers, car repair, and party or event planning.
  • Start your own business - a popular way is to sell items on eBay or Amazon. You can also consider being a representative of Avon or Amway.

What to do if you have no proper retirement plan

Your employer might not have provided you a retirement plan. You expect to draw on Social Security benefits after you retire but these may not be enough. Consider the following options if you think you need to step up your income:

  • Continue working - this assures you get to earn a salary, which can help you with your living expenses. If you are receiving Social Security benefits, be aware that opting to continue working may impact the benefits you receive. For details on this, go to http://www.ssa.gov/retire2/whileworking.htm.
  • Use your real estate property - If you own a home or real estate property you can use this as a means to provide you retirement income. Your options include:
    • Renting out a room - this can be a good idea especially if your home is near schools or universities.
    • Getting a reverse mortgage - homeowners who have substantial equity in their home can use this type of mortgage to get retirement money. Payouts on this loan may be monthly or as lump sum. You do not pay back this loan not until you sell it, transfer to another home or when you die. Reverse mortgages do have their pros and cons. To get a better understanding of this option, go to http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm

Watch out for scammers

Retirees are usually targeted by con artists. You should always stay informed and remain active. Always remember, if it is too good to be true, it probably is.

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