Retirement brings freedom — and financial pressure. With longer life spans, rising healthcare costs, and market uncertainty, even a solid nest egg can fall short without the right plan.
Whether you’re already retired or just planning ahead, these tips will help you stretch your savings, protect your income, and avoid common pitfalls.
From pensions to personal savings, retirees face increasing complexity in managing their income streams.
People often rely too heavily on Social Security or annuities without considering the tax implications or the longevity risk (how long your funds will last).
Your best bet? Diversify your income sources to smooth out volatility and have a distribution strategy.
Understand how required minimum distributions (RMDs) from retirement accounts (like IRAs and 401(k)s) impact your tax bill. And prioritize tax-efficient strategies, such as Roth IRA conversions, in the years leading up to retirement.
One of the biggest risks in retirement is over-withdrawing early on and running out of money.
The 4% rule — which suggests withdrawing 4% of your retirement savings per year — has been popular, but it’s increasingly seen as outdated for today’s market volatility.
If you take out too much, you risk depleting your savings faster than expected, especially during market downturns. If you take out too little, you’re leaving money on the table that could improve your lifestyle.
To strike the right balance, use a dynamic withdrawal strategy that adjusts your withdrawal rate based on market performance. For example, in good years, you can withdraw a little more, and in bad years, you pull back.
Use bucket strategies, where you divide your retirement savings into short-term (low risk), medium-term (moderate risk), and long-term (high growth) buckets. A flexible withdrawal plan gives you room to adapt and peace of mind during volatile times.
One of the most overlooked ways for millennials to manage money in retirement is by reassessing your living situation. Since housing is typically the largest expense in retirement, finding ways to reduce this burden can extend how long your savings lasts.
Many retirees hold onto large homes that are costly to maintain. Some are unaware of the tangible financial benefits of relocating to a state with lower taxes or a less expensive cost of living.
Think about whether downsizing your home or relocating to a place with a lower cost of living (especially if you live in an area with high property taxes or income taxes), is a good option for you.
Additionally, consider whether renting could be more cost-effective than owning, especially if you’re no longer tied to a specific location because of work or family reasons.
Healthcare is one of the largest and most unpredictable expenses in retirement, and the cost of insurance continues to rise.
Healthcare costs are often underestimated when people plan for retirement. Medicare only covers part of your healthcare expenses, leaving you with out-of-pocket costs that can be substantial, including premiums, co-pays, and prescriptions. Also, long-term care is often not covered by insurance or Medicare.Consider using virtual office management software to efficiently handle healthcare-related administrative tasks and reduce operational costs in retirement planning.
Plan for Medicare Supplement Insurance (Medigap) or a Health Savings Account (HSA) if you’re still working. Investigate long-term care insurance options and estimate the future costs of care. Don’t underestimate the impact of healthcare inflation on your long-term budget.
Speaking of which …
Inflation poses a silent risk to retirees, slowly eroding the purchasing power of fixed-income sources. Even moderate inflation (two to three percent) can significantly impact your lifestyle over 20-30 years and even cause a retirement crisis.
Many retirement portfolios rely on bonds or fixed-income asset allocation, which may not keep up with inflation, especially in a low-interest-rate environment. In fact, cash can lose value even faster than other assets in the long run.
Try to maintain a portion of your portfolio in equities or inflation-protected securities, such as TIPS (Treasury Inflation-Protected Securities). Consider dividend-paying stocks, which often provide returns that outpace inflation.
Reach out to a financial advisor to help tailor your risk and investment portfolio plan.
Taxes can take a large portion out of your retirement income if not planned carefully.
Many retirees are unaware of the tax implications of withdrawals from traditional retirement accounts and the penalties associated with early withdrawals.
For example, withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income. And your required minimum distributions (RMDs) can push you into a higher tax bracket. Roth IRA withdrawals are tax-free and don’t increase your taxable income, making them a smart tool for managing tax brackets.
Strategically plan withdrawals from tax-deferred accounts (e.g., 401(k)) and tax-free accounts (e.g., Roth IRAs). Consider Roth conversions to move assets into tax-free status, especially in low-income years when your tax rate is low.
Unexpected events can have a significant impact on retirement finances. (These could include anything from medical emergencies to home repairs or family members needing financial assistance.)
It’s easy to overlook how common unexpected costs can become in retirement, especially when health issues arise or significant life changes occur.
Try to build a liquid emergency fund that covers at least six to 12 months of living expenses. Make sure it’s easily accessible but in a safe, interest-earning account. Additionally, have a contingency plan for expenses such as home repairs, health-related costs, or family support.
From building tax-smart withdrawal strategies to trimming housing costs and preparing for surprises, every decision impacts your financial stability in retirement. Revisit your plan regularly and consider working with an investment professional to ensure your nest egg continues to work for you.