Eight Steps to Get Your Finances in Order for Retirement
Use these tips to ensure you can make your retirement dreams a reality.Kathy Longo, CFP®, CAP®, CDFA Wednesday, 24 March 2021
The following article is based on content in my book, Flourish Financially: Values, Transitions, and Big Conversations. If you’d like to read more, you may purchase a copy here.
If you’re like most people, you have a pretty good idea of what your dream retirement looks like; where you’ll live, how you’ll spend your time, which hobbies you’ll cultivate. However, visualizing your ideal retirement lifestyle isn’t the same as preparing your retirement finances to make that dream a reality.
Even if you’ve been disciplined about saving for retirement, it’s common to harbor worries about running out of money. In fact, it is the number one retirement concern. This uncertainty can be even more stressful if you don’t have a solid idea of how much retirement savings you truly need. If you would like clarity and more peace of mind, use the eight steps below to get your finances in order and create a successful and fruitful retirement plan.
1. Set Goals
Setting a goal is about more than choosing an arbitrary number to shoot for. Your plan should consider your lifestyle and how much that lifestyle will cost. Also, be sure to consider any financial support you intend to provide to children or grandchildren while you are alive, as well as anything you might like to leave in your estate plan.
2. Create a Spending Plan
Having a well-thought-out spending plan will help you establish financial goals and control your expenses. In addition to watching your spending and reducing debt, you need to create a way to replace your current income stream in retirement. This may be as simple as setting up your account so you receive a monthly “paycheck” that comes from your investment accounts rather than an employer when you retire. This often helps people who are used to getting and spending a paycheck stay within their budget.
Your spending plan and your savings plan need to work hand-in-hand. Obviously, you can only save money you don’t spend. Building a prioritized line item for monthly savings directly into your budget will help you stay on track with your planning goals.
4. Plan for Social Security
It would be a mistake not to give Social Security much thought until the day you make your filing decision. It is important to consider each claim option prior to deciding how and when to receive benefits. If you are married, it is even more important to plan ahead. The decisions you make about Social Security can negatively impact a surviving spouse in the event of your passing. Thinking about Social Security sooner rather than later can help you make a decision that will maximize your benefits and provide an added layer of protection as you age.
5. Look at Tax Planning
Many retirees find it difficult to determine which accounts to use for living expenses, as there are various tax consequences depending on the type of the account. You must begin taking withdrawals from your retirement accounts at age seventy-two. If you plan to retire before reaching that age, strategically using retirement accounts earlier may help minimize taxes. Overall, it is important to come up with a tax-efficient plan to use your assets, along with income sources such as Social Security.
6. Consider the Legacy You Want to Leave
In addition to developing spending and savings goals for retirement, some people want to leave money to children, grandchildren, or charities when they pass. These gifts are called “legacies,” and they should be considered in every retirement plan. If you want to leave $250,000 to each of your children, how you spend and save today will look different from what it will if you want to leave $10,000 to each of them. Of course, it’s worth mentioning that you have to be comfortable with your ability to meet your own needs in retirement – and that you won’t run out of money – before you can think about leaving a legacy. At the same time, leaving a legacy isn’t for everyone. It’s a personal choice that you should make thoughtfully.
7. Pace Yourself
Retirees often go through a honeymoon phase where they go full tilt at everything they wanted to do when they were working but couldn’t due to time constraints or other obligations. While diving into your new life is wonderful, it’s important to pace yourself to maintain a balanced spending plan.
8. Plan for Unknowns
You may not know what unknown expenditures will creep up on you in retirement but know there will be some and create some flexibility for them in your budget. For example, I worked with a couple who changed their retirement plan after learning that their two children, who were in their twenties, did not have health insurance. They knew that if something happened, they wouldn’t want to leave either of their kids in the hospital with unpaid bills. This knowledge and the fear that they might have to pay for their children’s health care affected how they viewed their expenses in retirement as they cut back on some of their travel to create room in their budget for health insurance premiums.
It's worth noting that, sometimes, unknowns will leave you with extra funds. For example, some people are frugal, so they end up having extra money at the end of every year. Others don’t spend as aggressively as they thought they would, due to unforeseen circumstances. Some of my clients prepared to provide for potential grandchildren they never had, which is another unplanned circumstance that can leave money in your pocket.
Making Your Retirement Dreams a Reality
It’s fun to dream about your dream retirement, but it will undoubtedly be more enjoyable to live it. Following the eight steps above to get your finances in order will help ensure they can support the retirement lifestyle you want.
About the Author
Kathy Longo brings over 25 years of expertise and experience to Flourish Wealth Management. Kathy is wholly dedicated to improving the life of each client and finds joy in making complex matters simple and easy to understand. She excels at asking the right questions, uncovering new possibilities and implementing the most advantageous strategies for success. Playing such a pivotal role in her clients’ lives remains an honor and a privilege. After earning a degree in Financial Planning and Counseling from Purdue University, she began her career at a small firm in Palatine, Illinois where she worked directly with clients while learning to build a viable, client-centric business. Over the years, she gained extensive knowledge and wisdom working as a wealth manager, financial planner, firm manager and business owner at notable, various sized companies in both Chicago and Minneapolis.