Planning Tips for Retirement (Part I)
When you check your phone, are you hoping for photos of your grandkids? Does life these days afford you more time to pursue your passions or discover new ones? If you concentrate, can you remember what the commute was like? If you’re done with the rat race, then this article is for you. Here is part one of some timely financial planning topics for those who are retired.
Check that Emergency Fund
You want to have enough to cover 3 to 6 months of living expenses. You can’t rely on a paycheck to bail you out in a pinch in retirement. If you need to raise cash, you will likely need to sell some of your investments. It’s best if you don’t have to sell during a market downturn to cover a new set of tires. Better to harvest cash during good times with intention than during bad times out of necessity.
Review Your Cash Flow and Tax Strategies
Just like with the emergency fund, you want to know that your investments and investment vehicles are working with your needs in mind so that you can avoid panic selling during bad markets. You also want to be wise about the tax implications of your actions.
You may have worked up some informal projections at some point to see what you’ll live on in retirement. If you track your finances closely, you probably know that month-to-month or even year-to-year expenditures are not linear or evenly distributed. During the last two years, many retirees have found that their investment accounts have grown while their travel budgets have gone unspent. But maybe you bought some new toys to keep yourself occupied instead of traveling? Pandemics, travel, toys, inflation, and other hard-to-budget items are part of real life. Does your cash flow plan adapt to life’s changes?
This time of year, retirees are especially mindful of their tax situation. Unless your retirement account is a Roth, required minimum distributions are something every IRA owner must deal with in retirement. Your money was tax-deferred going in. It grew free of income and capital gains taxes inside the IRA, but funds coming out are taxed as ordinary income. The tax bill is no fun, but the cash itself is certainly useful.
April showers bring May flowers, and bull markets bring capital gains taxes. If you sell anything for a profit outside of a retirement account, the IRS wants to share in your good fortune.
For people who are charitably-minded, there are very good strategies for easing both IRA distributions and capital gains taxes while helping your favorite non-profits. I like to mention the charitable IRA rollover and gifts of appreciated securities to anyone making donations.
Consider Your Risk Tolerance
The old Wall Street saying is that if you don’t take the time to rebalance your portfolio, the market will do it for you. We all have a high-risk tolerance when the market goes up. The first quarter of 2022 has been far more volatile than usual. Has that affected your thoughts about your portfolio? Depending on where you are in your retirement, you may have less appetite for risk. But don’t get too conservative either. Your 90-year-old self will need access to money that has outpaced inflation.
These three tips are a great place to start your financial planning in retirement. Be on the lookout for the second part of this blog post, where I will share more planning tips for this stage of life. If you want to discuss any of these topics, or if I failed to mention something that’s on your mind, I hope you’ll reach out.
