4 Money Management Tips All Retirees Need to Know

After decades of living as a salaried employee, retirement marks a significant change in how you manage your money. When living on a fixed income, it’s more important than ever to follow a budget and keep expenses predictable. If you’re nearing retirement and starting to plan your financial future, these are four tips you need to keep in mind.

1. Step Up Your Health Coverage

Most expenses go down in retirement, but health care is a big exception. According to Fortune, while health care only accounts for 8 percent of the average person’s budget pre-retirement, that number jumps to 19 percent by the time retirees turn 85.

One mistake retirees make is assuming Medicare will cover all their health expenses. While it’s true that Medicare Part A is free for most people — that is, there’s no monthly premium payment — in 2018, Part B costs $134 a month for most seniors. However, Parts A and B don’t cover everything, and the gaps can cost seniors a lot of money if paying for care out of pocket.

For that reason, many older adults opt to purchase supplemental coverage through Medicare Advantage plans, such as those offered by Aetna. Medicare Advantage plans expand Medicare coverage to include vision, dental and prescription coverage so seniors to minimize out-of-pocket medical expenses.

If you are eligible for Medicare or are near the age of eligibility, you should take time to learn more about the coverage, requirements and enrollment dates.

If you’ve had a financial setback, this article can help.

2. Know Your Tax Obligations

When you work for an employer, they handle most of the work of paying taxes for you. But once your income is coming from retirement savings and investment accounts, taxes get more complicated.

Retirees should understand how different retirement accounts are taxed so they can minimize their tax burden in retirement. Distributions from tax-deferred accounts like traditional IRAs, 401(k)s, and pensions are taxed at your ordinary income tax rate, while Roth IRAs permit tax-free distributions for individuals over 59½.

Capital gains from investments may be subject to additional taxes, and in some cases, Social Security income is taxed as well. Because the right strategy for minimizing taxes and maximizing income depends on account allocation and tax brackets, retirees should research thoroughly and talk to a financial advisor before they start making withdrawals.

3. Re-evaluate Your Housing

That three-story, 3,000+-square-foot home was great for raising kids, but it might not be as practical in retirement.

Not only are big homes more expensive, which means hefty mortgage payments if it’s not paid off, but they also take a lot of effort to maintain. The multiple stories and big backyard that you enjoyed when the house was packed with kids can also become a safety hazard as mobility declines with age.

Downsizing to a smaller home is an effective strategy to save money on housing and reduce the burden of upkeep during retirement. Downsizing also frees up money for remodeling projects that help seniors age in place safely, like installing hard floors, adding lighting, and creating accessible bathrooms.

4. Calculate Your Discretionary Budget

Most people dream of traveling, dining out and generally enjoying a life of luxury and leisure in retirement. However, retirees shouldn’t assume they can afford the finer things in life until they’ve calculated their budget.

 

Adults nearing retirement should create a budget that accounts for fixed expenses including housing, health insurance and transportation, as well as bills that are harder to predict, like long-term care costs. It’s important to set aside enough for these expenses, including a buffer, before spending “fun money.”

If retirees want to increase their discretionary income, they should seek ways to reduce non-essential expenses or increase income, rather than using money earmarked for other expenses. SmartAsset offers additional advice on creating a retirement budget.

 

If you’ve diligently saved to prepare for retirement, following these tips is fairly straightforward. However, if calculating your budget and expenses makes you realize you’re not as prepared for retirement as you thought, you’ll need to re-evaluate your financial plan to ensure a comfortable retirement.

Finances in retirement are complicated, so consult with a financial advisor to determine your best path forward.

 

About the Author

Michael Longsdon (info@elderfreedom.net) understands the process and challenges associated with helping seniors downsize, and he’s had first-hand experience helping his in-laws downsize and resettle.