When you dream about your retirement, what comes to mind? Do you envision yourself on the beach with a frozen cocktail in your hand? Or maybe you picture yourself jet setting around the world with your spouse. Your image of retirement may sound sublime, however, there are a few things no one tells you about retirement.
In order to achieve your retirement dreams you need to know what to expect.
You have 24 hours in a day and 7 days a week
You may think that having all the time in the world would bring you joy and fulfillment. Contrary to popular belief, depression is common among many retirees. Once retirees leave the workforce, they often lose many of their socialization opportunities as well as their mental and physical activities.
Many retirees focus so heavily on saving and investing for retirement that they forget they need to plan for a new lifestyle, as well.
Retiring is about spending time with the ones you love and doing activities that bring you fulfillment. If you don’t have hobbies or a social calendar, it may be time to start thinking about activities and people that will add joy to your life.
Planning your retirement lifestyle starts well before you retire. You need to build a network of friends and engage in hobbies you enjoy. In retirement you will have unlimited time, how will you choose to spend it?
You have worked toward your retirement for decades. Now it’s time to truly relish in your accomplishments and enjoy the fruits of your labor. The world is your oyster, spend your time doing whatever brings you the most joy.
Required minimum distributions can raise your costs
Upon reaching 70 ½ you’re required to begin taking distributions from your traditional IRA or 401(k) annually. For the few years leading up to your required annual distribution age, you’re able to take advantage of the tax benefits associated with these retirement accounts. However, when you reach the right age, Uncle Sam wants his piece of the pie.
The IRS requires you to take distributions so they can begin receiving tax dollars on your capital gains and withdrawal amounts. These distributions will start fairly small but then increase overtime. All distributions are taxed as earned income. The increase in your taxable income may impact your Social Security benefits as well. Potentially, cutting them in half. More about this later.
It may be wise to begin investing in a Roth IRA to minimize your tax burden in retirement. You contribute to a Roth IRA with after-tax dollars. Then when you go to withdraw your funds, distributions are tax-free. Taking distributions from a Roth IRA in retirement may help lessen your tax bill during your golden years.
Social Security and retirement benefits are taxable
Whether you decide to continue working or receive dividends from your investment accounts, any extra income could increase your tax bill. If you earn any income in retirement, your Social Security benefits may be taxed. What if you file an individual tax return and earn between $25,000 and $34,000, your Social Security benefits could be taxes up to 50% and taxed up to 85% if you earn over $34,000.
If you file jointly, you could be taxed up to 50% if you earn between $32,000 and $44,000 and taxed up to 85% if you earn over $44,000. This could end up taking a large chunk out of your retirement plan.
If this information comes as a surprise to you, it may be wise to partner with a financial professional such as a financial advisor or planner. A financial advisor can help you create sequential steps so you can create a plan now to better manage your taxes in the future.
Your financial advisor will assist you in developing a retirement investment strategy that may help you minimize your tax bill in retirement.
Your total portfolio may increase in retirement
Once you reach retirement, you may need to begin dipping into your total portfolio. This will assist you in sustaining your lifestyle. You can work with your financial advisor to develop an appropriate withdrawal rate to coincide with your financial situation. This withdrawal rate should help you through the ups and downs of the market during your golden years.
But what if there are no down markets in your retirement? Will you live comfortably or end up with more than you started with?
It’s possible that your market returns could allow for your portfolio to grow, even with your extra distributions. It’s even possible to end up with more than you started with.
Keep in mind, many financial professionals have different opinions about the best withdrawal rate. Consulting your financial advisor will help you establish the best withdrawal rate for your financial situation. You may even end up with more than you started with.
It’s crucial to maintain a strict budget in retirement
Retirement isn’t a finish line, it’s just a mile marker. Many people assume that once they reach retirement, they can stop planning for the future and kick budgeting to the curb. This assumption is far from the truth.
Once you reach retirement, you will most likely have a fixed income. If your expenses fluctuate, you may have to adjust your budget accordingly. For example, since you no longer commute to work, your transportation expenses may decrease. These expenses would include gas, car maintenance, and other costs associated with commuting.
On the other hand your health care cost may rise. According to the Fidelity Retiree Health Care Cost Estimate, the average 65 year old couple retiring in 2018 will need $280,000 to support their health care costs alone.
If you don’t account for these expenses you could end up in the red at some point during your retirement. Budgeting is crucial to maintaining a secure retirement. Prioritizing your budget is a key factor that often goes undiscussed, when the conversation of retirement arises.
The bottom line
There are numerous things no one tells you about retirement. It’s your responsibility to do your research and partner with a financial advisor who will help you develop a retirement investment strategy to help you thrive in your golden years. With the proper planning and preparation you can make your retirement dreams a reality.