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Financial planners talk about three stages of retirement: “good years,” “down years,” and “bad years.” Expenses tend to be highest at the beginning and end of retirement, forming a U-shape. However, many people think of retirement spending as a fixed variable.
Jonathan Swanberg, a certified financial planner in Houston, says, “When you get into retirement, especially early in retirement, you find yourself spending all kinds of money, and then you find yourself cutting back. I can’t imagine it anymore,” he says.
However, the big trips and experiences you plan for your golden years are often one-offs, and as you get older, you may naturally travel less and spend less. And at the end of life, spending increases on things like: long term care.
“When you look at all the numbers, they kind of smile,” says Michelle Crum, a CFP in Ann Arbor, Michigan.
Here’s how you can rely on this spending pattern.
clarify your goals
While the U-shaped retirement plan works for many people, it doesn’t work for everyone. You and your financial professional should discuss what you want to have in retirement.
“If you’re a couple, you need to make sure they’re on the same page,” says Crum. She says some people want to take a vacation until the end of her life, buy a new home or always donate money. “They are not good candidates for a smile strategy.”
delay social security
The longer you wait for your bill, the more social security, The higher you pay, the more you earn. Although you will have to withdraw a disproportionate amount from your retirement savings initially, you will be able to withdraw more from Social Security later in life.
“The other half of ‘U’ is covered by Social Security, with less money coming from savings,” Crum says.
If you don’t have the ability to wait, you may end up taking a more linear path to retirement.Crum says he has little to recommend it. Receive social security at age 62. “But if they have medical issues and a lot of other things going on, they’re not on board with a smile spending strategy,” she says. “They are more concerned with survival strategies.”
Keep fixed costs low
The more you simplify your balance sheet, the more you can pay off your mortgage, eliminate credit card debt —You should have more freedom to adjust your retirement spending as needed. If the stock market crashes, you’ll be able to cut back on discretionary expenses, so you’ll take less out of your savings for the year.
“We’re trying to figure out where we can make cuts if things go south,” Swanberg said.
For retirees with large fixed expenses or those with children to support, budgeting for a stylish trip during the year of early retirement can be difficult. “Maybe we don’t have as much spending in the early stages because we don’t have as many tools in case we need to cut the budget,” Swanberg said.
Plan for long-term care
People spend more on health care and long-term care later in life, forming a U-shaped back end. Long-term care insurance (or a similar product) can make a big difference here.
hybrid policy A policy that combines whole life insurance with a long-term care rider has the advantage of ensuring someone is paid no matter what happens, but it can be expensive.
If a client doesn’t have long-term care insurance, “we typically recommend holding back $300,000 because, on average, that’s the amount you’ll need for long-term care,” Crum says. To tell.
If you have equity in your home, you may be able to use it to pay for retirement expenses. “In most cases, you can repurpose that home equity for additional costs related to long-term care,” says Joel Cundick, a CFP in McLean, Virginia.
Manage your income strategically
How you withdraw your income (think taxable vs. tax-free accounts) affects everything from the taxes you pay to your medical expenses. (medicare Parts B and D cost more for people with higher incomes. ) Convert some of your savings to a Roth IRA Or you can offset capital gains by claiming losses. Working with an advisor to optimize your retirement income gives you more flexibility when you need it.
“There are smart ways to take money out of your retirement plan and smart ways to secure retirement income,” says Katherine Varega, a CFP in Winchester, Massachusetts. She said, “Let’s work with someone to make sure we can economically optimize our taxes.”
This article was written by NerdWallet and originally published by The Associated Press.
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Kate Ashford, CSA®, writes for NerdWallet. Email: kashford@nerdwallet.com. Twitter: @kateashford.
article Retirement spending follows a U-shaped curve.Here’s how to maximize originally appeared on NerdWallet.