Building enough wealth to sustain yourself in retirement is a monumental achievement. But financial planning doesn’t end when you no longer rely on a paycheck.
The way you handle your money in retirement is as important as it is before you exit your job.
Once you leave the workforce, it can be harder to bounce back from financial setbacks. You’ll need to stay on top of your finances to make sure your savings and retirement income last for the remainder of your life.
Making the following financial moves upon retiring will help ensure you don’t outlive your money.
1. Review estate planning documents
After retiring, it’s a good idea to review and update your estate planning documents.
One of the most important of these documents is your will. As Money Talks News founder Stacy Johnson explains in “Do I Really Need a Will?“:
“A will is simply a legal document that specifies what you want done with your stuff after you die: your money, your property and — theoretically — even your kids. What happens if you die without one? Simple: The state steps in and makes those decisions for you.”
But life is full of changes. If you marry, divorce, inherit wealth or purchase property, you may need to update the will to reflect your new circumstances. For example, the birth of a grandchild may prompt you to adjust beneficiaries.
Reviewing your will after retiring and then periodically thereafter can put your mind at ease about the well-being of heirs.
If you don’t have a will, use your newfound free time to make one. The process can be as simple as going online and using a service such as Rocket Lawyer to generate a will.
Other estate planning documents to review — or create — after retiring may include living wills, power of attorney designations and letters of intent.
2. Review your beneficiaries
Beneficiary designations are another aspect of estate planning that is critical to ensuring assets are distributed according to your wishes.
As we note in “8 Documents That Are Essential to Planning Your Estate“:
“When you purchase life insurance or open a retirement plan or bank account, you’re often asked to name a beneficiary, which is the person you want to inherit the proceeds when you die. These designations are powerful, and they take precedence over instructions in a will.”
So, as with your will, review your beneficiary designations upon retiring and then periodically throughout retirement.
3. Prepare for your funeral
No one likes to contemplate their death, but it’s important to make sure your loved ones are financially prepared for your funeral. By planning your own funeral, you will relieve family of the burden of having to plan it while grieving.
There are plenty of ways to bring funeral costs down, as we detail in “11 Ways to Make a Funeral Affordable but Not Cheap.” And by planning your funeral in advance, you will have ample time to explore all options.
4. Reconsider your transportation options
If you have two cars but could get by with one, consider selling one to reduce your insurance costs in retirement. If you retire to an area where you could get by without owning a car at all, even better.
Seniors tend to pay higher insurance rates than younger people. Getting rid of a car will also save you thousands of dollars a year on other vehicle costs.
5. Build up your emergency fund
Having money set aside for unexpected expenses is as important for retirees as it is for workers.
An emergency fund can help you avoid prematurely withdrawing money from retirement savings, which would cost you not just the amount of money you withdraw but any earnings that money might have generated.
Additionally, once you stop working, you will have fewer opportunities to earn extra money to replace the cash you withdraw from retirement accounts for emergency expenses.
6. Plan for required minimum distributions (RMDs)
You can’t keep your money in retirement accounts indefinitely. Required minimum distributions (RMDs) are a minimum amount of money the IRS requires you to withdraw from most types of retirement accounts each year, generally beginning in the year you turn 72.
You should understand and prepare for your RMD obligations before you reach that age.
If you miss an RMD deadline, or if the distributions aren’t large enough, you may have to pay a 50% tax penalty on the amount of money that you didn’t withdraw as required.
Additionally, RMDs are generally taxable income. So, they can impact your federal income tax rate as well as the “combined income” formula that determines the extent to which your Social Security benefits are taxable.
The IRS notes that RMDs apply to:
- Traditional individual retirement accounts (IRAs)
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit-sharing plans
- Other defined contribution plans
The amount of an RMD depends on your life expectancy and the balance in your retirement accounts. The IRS provides online worksheets to help you make calculations. The Securities and Exchange Commission’s Investor.gov website also offers an RMD calculator.
Still, drawing down funds from retirement accounts can be complicated enough to merit the aid of a financial or tax adviser. If you decide to go that route, you can find a vetted fiduciary — an adviser required to put your best interests first — through the free service Wealthramp.
7. Consider dropping life insurance
One way you can save money in retirement is to drop life insurance policies. This may be practical if you no longer have people depending on your income.
The main purpose of life insurance is to make sure loved ones have an income stream if you should die unexpectedly. For people who are raising families, life insurance is often essential to make sure dependents have enough money to provide for such basics as food and shelter, as well as the cost of higher education.
However, if you are retired, your children are grown and you don’t have a spouse who relies on your income, you may decide that money spent on life insurance would be better spent elsewhere.
“7 Reasons You Should Not Buy Life Insurance” takes a close look at this issue.