Erickson Braund, CFP®, CRPC®. Eric is the Founder and CFO of Black Walnut Wealth Management with a Finance degree from Hillsdale College.
Retirement marks a significant and exciting milestone in a person’s life. However, the transition can also present various financial planning challenges, particularly in the first 10 years.
The early years of retirement set the foundation for your long-term financial security and success. In this article, I’ll explore the most common financial planning challenges you may face in the first decade of retirement and how to overcome them to enjoy the retirement you deserve.
Challenge No. 1: Managing Cash Flow
Having a clear picture of your cash flow can help you manage your expenses and ensure you have sufficient funds to cover your wants and needs in retirement. Healthcare and unexpected costs, in particular, can be significant expenses for retirees. It’s essential to anticipate and manage these costs to prevent them from derailing your plan.
One way to manage expenses is to develop a sustainable withdrawal strategy from your investments to fund your retirement expenses and maintain a steady income stream. Morningstar’s 2022 State of Retirement Income report considers 3.8% to be a “safe” starting withdrawal rate for new retirees.
Once you determine your withdrawal rate, many retirees like to set up monthly transfers from their investments to their bank account as a monthly “paycheck.” This way, you always know what to expect and can easily budget and set money aside for unexpected expenses.
Challenge No. 2: Balancing Growth And Income
Retirees typically have a finite amount of resources with which to support themselves. Diversifying your portfolio between growth and income investments can help reduce risk and volatility. It can also provide a steady income stream to meet your needs while ensuring your savings grow enough to keep pace with inflation.
Focusing solely on income generation may hinder growth opportunities and potential long-term gains. Additionally, income-producing investments don’t let you take advantage of lower capital gains rates since they are taxed as ordinary income. On the other hand, focusing exclusively on growth may expose you to unnecessary risk.
Balancing growth and income can be a delicate dance. Consider speaking to a financial planner to help you create a plan that considers your personal situation, goals and risk tolerance.
Challenge No. 3: How To Spend Your Time
How you choose to spend your time in retirement can significantly impact your overall financial plan. People ages 65-74 have almost seven hours of leisure time per day, according to data from the 2022 American Time Use Survey. This newfound freedom allows retirees to explore new hobbies, travel or even start a business.
However, pursuing these activities can require additional funding, and it’s important to factor these costs into your retirement plan. For instance, if you plan to travel frequently, developing a budget that considers lodging, transportation and dining out expenses is crucial. Similarly, starting a business may require initial capital, liability insurance and other ongoing costs.
Remember that certain expenses may be higher in your early retirement years. For instance, travel costs tend to be higher in your 60s than in your 80s, as mobility issues and health concerns may limit your ability to travel later in life.
Challenge No. 4: Planning For Large Purchases
Large purchases can quickly add up. Whether it’s a new car or helping with a child or grandchild’s wedding, it’s crucial to anticipate these expenses and set aside funds to avoid dipping into your retirement savings.
Work with your financial planner to run through different scenarios and determine the feasibility of a large purchase that considers the potential impact on your retirement plan. For example, increasing your withdrawal rate to fund a large purchase may push you into a higher tax bracket, resulting in higher Medicare premiums.
Challenge No. 5: Managing Taxes
To effectively manage taxes as a retiree, it’s important to consider factors such as:
• If and when to do Roth conversions.
• When to start taking Social Security benefits.
• When and how much to withdraw from your IRAs.
Additionally, retirees should be aware that their Social Security benefits may be taxable, depending on their income level. If you and your spouse’s combined income exceeds $44,000, up to 85% of your Social Security benefits may be taxable. New retirees must understand how their benefits are taxed and plan accordingly to avoid unexpected tax liabilities.
Navigating your finances as a new retiree can be complex, but the right strategies can help safeguard your retirement for years to come. Consider speaking with a financial planner to develop a plan to maximize your resources while minimizing potential risks.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.