Investment After Retirement And How To Manage Your Money

Perhaps you’ve been focused on retirement planning for decades, waiting until the day you can finally retire. But will you know how to manage your money after retirement?

In retirement, everything from your expenses to your lifestyle will change. So, your money management strategies, including your approach to investing, will have to adapt along with these life changes.

Tips For Managing Money In Retirement

Are you prepared for taking money out of your retirement accounts? What about navigating Social Security? Keep these tips in mind and use them for your benefit when managing money in retirement.

1. Plan For Your New Spending Habits

As you age, your expenses will likely change. For example, if you have children, they’re now likely grown and your child-related expenses have likely significantly decreased. However, the percentage of your expenses related to health care is likely increasing with age and the health-related issues that typically come with getting older.

Expenses will also depend on your retirement lifestyle. If you want to spend your retirement traveling around the world, it could cost you a significant part of your savings. You might want to use your money to instead treat your children or grandchildren to gifts or college savings.

It can help to create a budget and break down your expenses once you’re in retirement. That way, you can see how your costs have changed and if you need to adjust your retirement plan as a result.

2. Manage Your Investments

Managing your investment after retirement should differ from the days of your youth. While you may have taken more investment risks earlier in life, you may now consider taking a more conservative approach to your investment portfolio. For example, you might change your portfolio asset allocation to reflect your change in age and lifestyle.

More specifically, if you adhered to a traditional 60/40 portfolio, with 60% of your assets in stocks and 40% in bonds, you’ll likely want to reallocate the assets in your portfolio to be less risky in retirement. This could mean moving more of your money to bonds, or even to cash, to reduce your investment risk even more.

Investment Options

Consider these investment types to potentially increase your retirement savings and retirement income:

• Real estate: Owning property can be a great investment. With real estate, you can possibly earn money in two ways: from the sale of your property if its value increases, or through regular income from renters or tenants.
• Bonds: As a bondholder, you’re lending money to a corporation or government entity. In return, you can expect to receive steady interest payments.
• Annuities: Annuities are insurance policies that you purchase today in exchange for regular, fixed income in the future.
• Stocks: Stocks can be more risky, but those that pay dividends can provide you with another steady source of income.
• CDs: Certificates of deposit are a low-risk investment and are FDIC-insured up to $250,000. While you’ll receive a relatively low interest rate on your money, you can rest assured your money is well-protected.

3. Consider Working In Retirement

Do you enjoy your work? If so, there’s no rule or law saying you must retire once you reach a certain age. In fact, working in retirement has proven to have many health benefits, such as keeping your mind sharp, reducing your risk of depression and maintaining social connections with co-workers. Plus, the income you receive from your job will continue to add to your retirement savings.

4. Don’t Forget About Social Security Benefits

You’ve paid into Social Security for decades, and now you can use this money as income for retirement. The amount of Social Security benefits you’ll receive will depend on the age when you start taking benefits and how much you’ve earned over the course of your working career.

In short, your benefits are calculated based on the average of your highest 35 years of earnings and your full retirement age, which is between 66 and 67 depending on your birth year. Based on these numbers, your full retirement benefits are determined.

When Should You Start Taking Benefits?

Did you know you don’t have to wait until your full retirement age to take Social Security benefits? You can take benefits as early as age 62, but you’ll receive only a portion of your full benefit amount. On the flipside, if you can wait until age 70, you’ll receive a delayed retirement credits up to 8.0% a year depending on your birth year and dependent on whether you’re insured under Social Security at retirement age. Consult a financial professional for assistance decoding your unique Social Security situation.

Your choice of when to start taking benefits will likely depend on the answer to these questions:

• Do you need the money?: Even if you’ve planned your retirement expenses years in advance, unexpected situations can arise. And, if your expenses are piling up earlier than you expected, you may need the extra cash from Social Security early.
• How long do you expect to live?: While you’ll receive less money for taking benefits early, you’ll receive regular payments for longer. This can be financially beneficial if you unfortunately don’t live until your average life expectancy. However, if you live past your expectancy, waiting will produce more income for your retirement.
• Are you married?: If your benefits are greater than your spouse’s benefits, you might consider waiting. If your spouse outlives you, they can receive your benefits even after you pass on.

What If You Continue Working In Retirement?

If you continue working in retirement, it will affect your Social Security benefits. The Social Security Administration (SSA) will start to reduce your benefits if you earn more than the yearly earnings limit.

If you’re under full retirement age for 2024 and earn more than $22,320, your benefits will be reduced by $1 for every $2 you earn above the limit. If you’re at full retirement age and earn more than $59,520, your benefits will be reduced by $1 for every $3 you earn above the limit, according to the SSA.

5. Understand The Retirement Withdrawal Process

After decades of putting money away in an IRA, 401(k) or other tax-advantaged retirement account, you’re now at the age where you can start withdrawing money from these accounts to enjoy the fruits of your labor.

How Much To Withdraw

This will depend on several factors, such as the type of account, your age and your need for money to support your retirement lifestyle. Many financial experts advise retirees to use the 4% rule, which states that you should withdraw no more than 4% of your portfolio’s total value each year in retirement. Adhering to this rule can help ensure you don’t run out of money in retirement.

Employer-Sponsored Plans

401(k), 403(b), and other employer-sponsored plans operate a bit differently than traditional retirement accounts. Generally, you can withdraw money from these accounts penalty-free as early as age 59.5. This allows you to start receiving income earlier than your full retirement age, which can help you cover expenses.

RMDs

Even if you have enough money to support your retirement without withdrawals, you can’t put them off forever. In fact, if your money is in an IRA, SEP or SIMPLE IRA, you’ll be forced to take required minimum distributions (RMDs). RMDs begin at age 72 (73 if you turned 72 after December 31, 2022) and are calculated based on your retirement account balance and average life expectancy for your age.

Roth IRA and Roth 401(k) accounts are not subject to RMDs. A Roth portfolio can continue growing tax-free even after your death. This can be a great option for those looking to pass down assets to future generations.

Taxes For Withdrawals

Depending on the type of account you’re withdrawing money from, you may be subject to income tax. For withdrawals on 401(k)s, 403(b)s and traditional IRAs, your withdrawals will be subject to ordinary income taxes based on your current tax bracket. On the other hand, because Roth accounts are funded with after-tax dollars, you won’t be subject to income taxes when withdrawing from your Roth account in retirement.

The Bottom Line

Retirement is a big life change. Whether you’ll work, travel the world or simply spend more time with your family, the last matter you’ll want to stress over is your financial situation and investments after retirement. By effectively managing money through Social Security, retirement account withdrawals and your portfolio, you can have the retirement you’ve likely always dreamed of.

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