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9 Min. Read

The Ultimate Guide to Managing Finances in Retirement

Published
A retired couple managing their finances

Whether you are already retired or see it on the horizon, knowing how to properly manage your finances in your post-working years is the key to a comfortable retirement lifestyle. When you reach retirement age, there are many economic realities that you should factor into your planning, which include everything from inflation to rising interest rates. To avoid making mistakes when planning for retirement, you should also understand how the economy can affect you. 

Keep the following areas of saving and investment on your radar as you look toward managing your finances in retirement.

How to Save for Retirement in Your 50s and 60s 

If you have yet to reach retirement age, you should take steps in your 50s and 60s to maximize your savings and bolster your retirement finances. 

Retirement Income Projections 

Some experts believe that by the time you reach age 55, you should have anywhere from 6-7x your annual salary saved if you want to lead a comfortable lifestyle in retirement. Once you reach your 60s, you’ll want anywhere from 8-10x your annual salary saved for retirement. 

As part of your planning, make sure you estimate what your retirement income will be; various online calculators can help. Along with money from your retirement accounts, you should also take any pension benefits or Social Security payments into account.  

Maximizing Savings  

During your 50s, you should also consider benefiting from catch-up contributions. After you reach 50, IRA and 401(k) annual contribution limits increase considerably, allowing you to save even more each year. 

Even though you can collect Social Security benefits starting at age 62, waiting until you reach age 70 can increase your payout significantly. 

Economic Realities to Factor Into Your Retirement Plan 

You’ll need to factor several economic factors into your retirement planning. For instance, the broader economy is experiencing high inflation, which means that the cost of goods has increased substantially. 

While you’ll no longer travel to work every day once you reach retirement age, you’ll still need to purchase groceries and make other necessities. When inflation is high, everything from groceries to cars will be more expensive, which means that your savings are essentially worth less during high inflation. 

Rising Home Values and Interest Rates 

Depending on where you plan to live in retirement, you may have to contend with rising home values and interest rates. If you plan on buying a new home in retirement, the increase in interest rates and home values can make this move more expensive than you might have initially expected. 

Rising home values will mean you’ll likely need to pay more to purchase a home. The higher interest rates will also cause your monthly mortgage payments to be higher. 

Debt in Retirement 

Another economic reality that many retired individuals overlook is the amount of debt they have. Credit cards, student loans, and other forms of debt can significantly impact fixed incomes. For this reason, experts recommend you try to avoid taking on too much debt once you reach retirement age, and perhaps even delay retirement until you’ve been able to pay down your existing debt.

Tax Liability 

The final economic reality that all retired individuals must consider is taxes. Even though you aren’t earning an annual salary from a standard job, you may need to pay taxes on some or most of your income. 

Although the money you take out of post-tax retirement accounts such as Roth IRAs will be tax-free, any distributions from pre-tax retirement accounts are subject to income tax. 

The IRS may tax your Social Security income as well, depending on how much other income you have. 

Different States Treat Retirement Income Differently 

Keep state income taxes in mind, as these will differ based on where you live. Some states, like Florida and Nevada, don’t impose any income tax, while others — like California — tax all retirement income except for Social Security benefits. Other states tax all retirement income, including Social Security benefits. 

Savings Vehicles vs. Investment Vehicles 

Once you reach retirement age, you will likely have access to one or more savings vehicles you opened before retirement. 

Savings vehicles are considered to be relatively safe when it comes to protecting the amount of capital in the vehicle. Most savings vehicles will provide low or moderate rates of return compared to the stock market. 

Savings Vehicles 

Since savings accounts are almost completely liquid, cash withdrawals are usually readily available. However, you may have to pay an early-withdrawal penalty if you take money prematurely from an account that specifies you not make withdrawals until a future date. Some of the more common savings vehicles include: 

  • Savings account. Money set aside for emergencies or very specific goals. 
  • Certificates of deposit. These savings vehicles often provide higher yields than savings accounts but typically have more restrictions on how and when you can access the money. 
  • Money market accounts. These accounts act as both checking and savings accounts and limit the number of transactions you can make each month. They can offer better interest rates than most savings accounts if you can make a high deposit. 
  • Checking accounts. 

Investment Vehicles 

Investment vehicles may be liquid or illiquid, depending on the type. They are generally more subject to volatility than savings vehicles. The most common investment vehicles include: 

  • Stocks. Most stocks involve owning shares in a company. The total percentage of ownership you have is proportional to the total number of stocks you’ve purchased. Many people nearing retirement age purchase stocks from numerous companies to diversify their investment portfolios. 
  • Bonds. These can be municipal, state, corporation, or government bonds. They provide investors with interest payments while ensuring that the initial capital is protected. Bonds issued by entities with strong balance sheets are typically seen as relatively low risk compared to stocks, and some bonds — such as municipal bonds — may generate tax-free income. 
  • Mutual Funds. These investments are generally viewed as less risky than holding individual stocks since they involve diversifying investments in hundreds or even thousands of stocks into one fund. Mutual funds can be either passively managed, meaning that they track some sort of index, or actively managed, meaning that the fund’s investment is managed by a group of experts who attempt to mitigate risk to investors while still achieving high returns. Note that passively-managed funds typically have lower expenses for investors than actively-managed funds. 
  • Exchange-Traded Funds (ETFs). An exchange-traded fund is a fund that operates similarly to a mutual fund. However, while a mutual fund cannot be traded throughout the day like individual stocks can, exchange-traded funds can. 
  • Commodities. These are basic goods or natural stores of value that can be exchanged for other commodities and differ in quality. While their prices fluctuate considerably, they are generally viewed as having a low association with equities. They can be used to hedge against a falling stock market or rising inflation. 
  • Real Estate. Even though real estate can be costly to invest in, a well-managed rental property can yield relatively high and consistent returns. 

Getting the Most Out of Your Retirement Plans 

If you have one or more retirement plans, you should know how to get the most out of these plans once you’re retired

Here’s a closer look at managing everything from your Social Security benefits to your 401(k) account.  

Pensions and 401(k)s 

You can start making withdrawals from your 401(k) account without incurring penalties once you reach 59 ½ years old. 

If you wish, you can also roll your 401(k) over to an individual retirement account (IRA) after you leave your company. Doing so may be a smart choice if your 401(k) plan charges excessive fees or you simply want more investment options than the small set of funds you can choose from in your 401(k). 

Keep in mind that minimum withdrawals will need to be taken from traditional 401(k)s, Roth IRAs, and traditional IRAs once you reach 72 years old. Roth IRA accounts, however, are not subject to required minimum distributions. 

As for pensions, each type of pension fund can differ regarding the guidelines the pensioner must follow once retired. Upon retirement, you can either obtain a lump-sum distribution or a monthly payment from your pension plan. 

If you’re not great with finances, consider selecting the monthly payment option to avoid spending too much of your retirement income in a single year.  

If you do take a lump sum, don’t view this as spending money; consider simply directly rolling over the money from your company’s pension plan to your traditional IRA. Done correctly, this rollover will not be a taxable event. 

Annuities 

If you have a fixed annuity, you should start receiving interest rate payments during your retirement years that can be used as a consistent income stream. 

Social Security 

Social Security retirement benefits will replace a percentage of your pre-retirement income. 

You will receive Social Security benefits in the form of monthly payments. Keep in mind that these payments can be reduced if you earn too much standard income during a given year. 

You can start receiving these benefits once you reach 62 years old. However, your benefits will increase if you wait to receive them until the full retirement age of 70.  

You may also become eligible for Social Security survivor benefits if you lose your spouse.

Retirement Financial Management Strategies 

Once you reach retirement age, there are certain financial management strategies you should look into if you want to avoid making costly mistakes. The right strategies can help you improve your retirement finances after retirement.  

Consider Getting a Financial Advisor 

A financial advisor can help you plan and manage your savings and retirement accounts while also giving suggestions for avoiding high taxes. Remember that these advisors can charge a flat fee, an hourly rate, or a fee based on the assets they manage for you. 

Make Extra Money 

Being retired doesn’t mean you need to stop making money. Some of the most practical ways you can earn money during retirement include: 

Tap Into Home Equity 

One option available to you is to tap home equity, which can be the largest source of wealth during retirement and can bolster your savings. 

You can choose to downsize, which will result in you selling your current home for a smaller home and pocketing the difference in value between these two properties. 

You could also obtain a reverse mortgage, making it possible to forgo monthly mortgage payments and borrow from the equity you’ve built. 

What About Cryptocurrency? 

While we’ve discussed traditional investment options previously in this article, one novel kind of investment that has attracted many Americans’ attention recently is cryptocurrency

It is important to understand that while cryptocurrency investments can yield high returns, they are also extremely risky. Even the most well-known cryptocurrency, bitcoin, can fluctuate by double-digit percentages in a single day. 

For this reason, most financial advisors recommend keeping cryptocurrency holdings to a very small percentage of your overall portfolio and not investing any more in cryptocurrency than you can afford to lose. Certainly, do not invest funds in cryptocurrency that you will need to access in the short term. 

Seek Professional Assistance 

Many retired individuals will continue investing to improve their retirement finances and potentially bolster their estate for future beneficiaries. Even with market and economic shifts, properly managing your finances during retirement involves making smart, informed decisions that will allow you to maintain a consistent income for years.  

While you can use strategies to improve your income, taking on too much risk could cause you to lose some of your savings. In addition to understanding the available investment vehicles and withdrawal strategies, it is always a wise decision to enlist the help of financial and tax professionals before making any major financial decisions.