Retirement is often seen as the finish line. After decades of hard work, planning and saving money are finally over. In reality, retirement is a major transition . It’s not simply a matter of flipping a switch and drawing on your retirement fund. The post-retirement phase requires careful planning and strategic decision-making. On a lighter note, it can also be a time to experiment with new ways of using money, like exploring new passions, lifestyles, and career paths. In short, good financial management and strategy in this phase of life is just as important as ever.
In this post, we’ll explore post-retirement planning, including the financial planning considerations and how we help our clients navigate its complexities. From recreating paychecks to bridging the gap to Medicare and Social Security, post-retirement planning requires an engaged and collaborative approach to ensuring clients can enjoy this major life transition without financial stress.
Recreating Paychecks with your Nest Egg
Arguably the biggest adjustment in retirement planning is transitioning from having a regular paycheck to relying on savings. It requires a complete psychological shift. It isn’t easy for most people to go from living their entire lives in “earning” mode to only spending out of their savings. It’s even more difficult for people who’ve had strong tendencies toward saving and frugality. Without a solid plan and understanding of how much is safe to spend, making this change can feel precarious. A common coping strategy is to over-tighten the belt in retirement, foregoing a better lifestyle in the name of caution.
In financial planning, we want to protect the sustainability of clients’ retirement funds while making sure they’re able to (safely) spend in line with their ideal life. The plan is to maintain–and hopefully increase–quality of life.
The first step is estimating how much our clients need to spend each year/month, and then create a steady and reliable income stream from their nest egg to cover it. We do this by adjusting the investment allocation so that there’s an optimal mix of stable funds (e.g. bonds) to draw upon in the short-term, and growth-oriented funds (e.g. stocks) to allow the nest egg to keep growing over the long-term. We then allocate a portion of cash from stable funds each year and set up automated transfers to clients’ checking accounts, similar to direct-deposit paychecks. Last, we adjust things based on how clients feel about their cash flow from month-to-month and year-to-year. .
Bridging the Gap to Medicare and Social Security
Many people find themselves retiring before they’re eligible for Medicare and full Social Security benefits, which means we often need a strategy to bridge the gap. Health care, in financial planning, is mainly a cash flow consideration. People have different circumstances. Some people are covered as a household under one partner’s benefits. Other people might have special long-term health benefits extended from their years of employment. The monthly cost depends on what’s available. In the post-retirement phase, we work with clients to understand what they have, and to explore options like private health insurance, COBRA, or joint health plans to cover medical expenses until Medicare kicks in.
Social Security benefits are higher the more they’re delayed. Of course, the numbers are based on life expectancy, and nobody knows exactly how long they’re going to live. So, there’s no way to “win” the game of maximizing social security benefits. It all depends on what your spending looks like, how big the investment portfolio is, and if there’s any additional income. Universally, it’s good practice to delay taking benefits until you really need them. Because once you start taking them, you’re locked in at a lower benefits level. If you wait a few months while working a part-time job to help with bills and protect your investment portfolio, it makes sense to delay benefits.
(Maybe) Converting Pre-Tax Retirement Funds to Roth Funds
During their working years, people will commonly contribute pre-tax dollars to accounts like 401ks, 403bs, and IRAs, which grow tax-free and are then subject to income tax upon withdrawal. With a Roth IRA, after-tax dollars are contributed, grow tax-free, and are tax-free upon withdrawal.
When full-time work has ended or slowed, people’s tax brackets may fall to a temporary, all-time low. Income has fully or mostly gone away, and large distributions from the retirement portfolio aren’t necessarily being allocated yet. With your tax bracket at its lowest point, we’d typically strike while the iron is hot and convert funds from pre-tax accounts to a Roth IRA. You’ll be able to pay lower taxes on these accounts and then save on taxes later when your tax rate is higher.
The decision of whether to convert pre-tax funds to Roth funds is complex and strategic. We consider things like the possibility of any additional future income and even estate planning goals. When working with clients, we devise a plan and revisit it regularly as their situation evolves. We will also set up a check-in towards the end of each year when we can see what the income and tax bracket will be for that current year, and then make an official decision on if/how much to convert to Roth accounts.
Re-Running the Plan Each Year
Retirement planning is not a one-time event, but an ongoing process. t’s helpful to review your overall retirement plan at least annually to account for personal and economic changes. This regular, proactive approach keeps the financial plan dynamic and responsive. It allows us to adjust the strategy on a dime, ensuring that clients stay on track to meet their goals.
Conclusion
Navigating the post-retirement chapter of your life is an important phase of financial planning. It doesn’t have to be daunting either; you can creatively structure your income so you can live your life to the fullest. The key to managing it well is to stay flexible and proactive, ensuring that your financial plan evolves with your needs and circumstances. A holistic approach paired with regularly reviewing and revising your post-retirement plan ensures that the retirement years are spent enjoying life, not worrying about finances.
Brandon Tacconelli is the Director of Client Care at Thinking Big Financial, Inc. Thinking Big is a fee-only financial planning firm in New York City specializing in working with the LGBTQ+ Community.