Transitioning into retirement: What to know about spending in your golden years

Published: November 03, 2017
Transitioning into retirement: What to know about spending in your golden years

For the number of Americans sailing off into retirement this year, many will have concrete financial plans in place that detail exactly how they intend to withdraw funds and ensure they don't deplete their savings too quickly. Others, not so much.

A new report from the IRS showed new retirees (those accepting Social Security, not necessarily those who have also entirely left the workforce) are spending more of their after-tax income in retirement than they were in the years leading up to retirement.

This finding draws two conclusions: Either workers are saving more money than government surveys are recording (and through different financial vehicles), or they are simply ramping up their spending habits once they reach retirement age.

The IRS discovered both premises are true. While ample savings is an obvious benefit to workers of all ages, as is the luxury of enjoying the hard-earned cash that's been stockpiled, the data shows that American retirees could still capitalize on financial due diligence as they transition into retirement.

More than the cash itself, those first few years of retirement can be make or break for many seniors.

Max out every savings opportunity in your 60s

If you're hoping to maintain or increase your spending once you reach retirement, you'll first need to do all you can to contribute to savings accounts prior to leaving the workforce. In the five to 10 years prior to retirement, much of your financial portfolio should be focused on maximizing contributions, obtaining employer matches and solidifying a long-term game plan for how large your nest egg will end up being.

Additionally, in your 60s, you may want to exchange some of your riskier stock options for more secure, low-risk bonds or mutual funds. This way you can more confidently estimate the future trajectory of your portfolio and not be as exposed to market downfalls at a time when you're retiring.

Decide when to accept Social Security payments

The earliest you can begin receiving Social Security is age 62, but you'll only be rewarded with 75 percent of what you paid in. The Social Security Administration considers 66 to be the full retirement age, whereby you qualify for full payment.

The longer you delay payments, the larger your checks will be once you choose to accept them, meaning if you have the financial latitude to postpone Social Security, you should. The precise date when you start receiving Social Security checks will dictate how much income you have each month during retirement, which determines your spending ability as well.

The IRS found that the majority of retirees upped their spending right when they opted to receive Social Security, which could be a knee-jerk reaction to an influx of cash or perhaps a sign that Americans are not treating retirement spending as they should - especially when it's pegged to a fixed payment structure like Social Security.

Create a near-term post-retirement financial plan

Retirement tends to be a multiyear process where seniors settle into a new norm. This holds true with spending, too.

That being said, the first three to five years of retirement are critical in shaping the future income and spending needs of retirees. If bad habits set in early, they may lead to savings depletion.

Set a monthly spending benchmark prior to retiring, and evaluate whether that seems like an appropriate figure once you're actually retired. You may need to accept Social Security payments sooner than expected - to offset savings depletion - or maybe it turns out you have a larger nest egg than once believed, allowing you to enjoy a vacation or two in your first few golden years.

Reassess spending and income annually

It's one thing to have a strong financial portfolio, but it's another to know how to use it during retirement.

Spending too much too soon could inadvertently set you up to outlive your savings, which is why it's paramount to set practical spending levels and then adjust them as time goes on.

Unexpected events such as medical emergencies, family expenses or natural disasters can wreak havoc on savings, even if you have insurance and a large nest egg. Realistically, your retirement could last 30 or 40 years, which is a long time for unforeseen costs to arise. Earmarked spending that once went to vacations or travel may at some point need to be put toward other more immediate concerns.

These sorts of events may prompt you to pick up an income-generating hobby, take out a reverse mortgage or withdraw funds more quickly, which eats into discretionary spending. Reassess your financial landscape early and often to ensure your future is still bright and your finances are secure enough to support you in the long term.

Investigate underutilized assets for greater financial longevity

Have a summer home you rarely use? A large vehicle left over from your time hauling around tons of children? A handy skill you could potentially be paid for?

These realities, among others, could be cash cows, allowing you to stretch your savings over a longer period of time, especially if you intend to really live it up in retirement.

By the time you retire, you shouldn't need to support financially stable family members (unless they're your elders!), and you'll likely find many things you've accumulated over the years that still hold value. If you're worried about outrunning your savings, it's best to put all your available assets to use, as well as look for new ways to reduce spending. True to the saying, you can't take it with you when you go.

There are plenty of savings accounts, withdrawal options and wealth management strategies to look into, so speak with a trusted advisor to know where to start. And remember, retirement is a long-term investment that can be customized to suit your needs - and that includes spending your money on things you've always wanted!

For more information on crafting a retirement savings plan, contact your local Farmers & Merchants State Bank today.

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