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What To Expect Your First Year in Retirement


At long last you are retired! Now what? The first year of retirement is full of surprises and some of them can be costly if you haven't prepared properly.

Here's what you need to know to kick-off your retirement right.

Make the transition

The biggest financial change or challenge for new retirees is the transition from living off a steady paycheck to living off their nest egg and any Social Security or pension that may be providing income. “They need to have a plan for how this transition may occur. The decisions they make now may affect their income for decades to come and could result in hundreds of thousands more, or less income throughout their retirement,” says David Shucavage, president of Carolina Estate Planners.

One key decision, and one where the wrong choice is often made, is when to start Social Security, he says. People often start at the earliest age, 62, if they are retired, or their full retirement age, usually 65 or 66. If they wait to start it, the amount they get the rest of their life goes up by 8% each year to age 70. In general, if a person waits to age 70 to take Social Security, versus age 62, and they live beyond age 81 or so, they will come out ahead says Shucavage. “If the surviving spouse lives into their 90s, it means even more money. It often pays to spend down the IRA or 401k money, instead of starting Social Security,” he says.

Stick to a budget

Maybe you got away all your life without doing a budget, a retirement of reality is that you only have so much money, there is no overtime or bonuses to provide cushions. A budget is a must. “Come up with a budget, or a new one, if you had one. Make sure it matches your income stream,” says Shucavage.

Though you may no longer have expenses associated with going to work, you have time to do fun things. Factor in the cost of any new hobbies, like fly fishing or ballroom dancing too. “Be sure travel expenses or golf course fees don't more than consume the income at hand. You must have a plan or you can end up spending too much,” he warns.

The transition from regular income to spending hard earned savings can create emotions and behaviors that may be counterproductive to feeling content in retirement. “A good rule to consider is having enough cash to cover your income/expense gap for three years. This can help as a guideline to overspending by measuring how much the bucket is depleted year by year,” says Renee Hanson, an Ameriprise private wealth advisor.

Set up a spending account

Have all income flows to it so you have one source to tap as a “paycheck replacement”, advises Maria Bruno, a senior investment analyst with Vanguard. The flows include Social Security, pension, plus any dividends, capital gains distributions or RMDs (required minimum distributions) form your investment assets.

Expect the unexpected

You could find just as you're enjoying the first year of retirement, all manner of stuff breaks loose. After all these years, “The boiler breaks down, you need a new roof,” says Patrick Morris, CEO of Hagin Investment Management. Or, you might need to replace the car you've been driving for the last 20 years.

Anticipate medical costs

One major cost is healthcare. Some employers offer health care plans that continue throughout a former employee's retirement. However, fewer employers continue to offer this type of benefit. “It has therefore become a burden passed on to the retiree. Account for out-of-pocket expenses for health care needs that may increase in retirement, or in the case of declining health. If you have pre-existing conditions, you may also experience higher health care premiums than anticipated,” says Ioana Comaniciu, a Merrill Edge Financial Solutions advisor.

You'll likely need to purchase individual health coverage to provide a bridge to Medicare or purchase a Medicare supplemental policy.

Know too, that if you want to continue with the life insurance coverage your company offered, you will probably have to convert employer sponsored group coverage to higher costing individual coverage, which will be an added expense, points out Ron Grensteiner, president of American Equity Life Insurance Company.

Don't go it alone

With your paycheck gone, there may be a stage of financial uncertainty that retirees should prepare for, says Ben Huddle, director of financial advisory services for Lincoln Financial Network.

If you'll start withdrawing money from your savings and investments consider working with a financial or tax advisor to maximize income while also minimizing tax liability. “Qualified money will be fully taxable as withdrawn, while non-qualified money will be taxed under an exclusion ratio so you will potentially need to pay estimated taxes on a quarterly basis to keep up with your tax liability,” says Grensteiner. Truth is, at this time of your life, you can ill afford financial mistakes, do get good financial help.


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