When I think about retirement I think about financial security in my golden years. It’s not about the size of your nest egg, but about how to manage your finances.
You need to get a clear financial picture before you quit your job. You need to figure out everything about how many accounts you have, how to manage them, in what order to withdraw money, tax liabilities, how your investments will generate income.
Organizing your finances for retirement will help you to feel more comfortable with your retirement decision. Instead of giving up on the retirement bucket list, you want to match your lifestyle to your available resources.
Moreover, organizing your finances for retirement will give a sense of control over your life. It will make the transition to retirement much easier to manage.
In this post, I want to go over 6 steps required if you want to get your finances in order before retirement.
1. List all your retirement accounts.
In retirement you’ll be paying yourself from the savings you have accumulated over the years. Thus, the first step to organizing your finances should be listing out all your retirement accounts.
Over the years Roman and I accumulated several 401(k) accounts from different employers. We managed to roll over them to our individual retirement accounts – IRAs and even Roth IRAs.
So far, we have multiple retirement accounts – (1) 401(k), (1) 401(k) Roth, (3) IRAs, (2) Roth IRAs and (1) investment account. I want to simplify our finances before we retire and combine them into one account.
When I roll over these accounts to a consolidated investment account it will be much easier to work with available funds. It will be easier to manage money withdrawals and decide on an investment approach with only one account.
Listing out all your retirement accounts will give you a better idea of the available money you have to manage.
2. Write down your assets and liabilities and calculate your net worth.
You next step is to organize your assets and liabilities/debt. This step should help you to get a general overview of your finances and estimate your net worth.
You can do it on a simple piece of paper or create a spreadsheet in Excel, Word, or Google.
List everything you own. Start with your major assets like home, cars, boat, vacation home, rental properties, collectibles, gold coins, and anything else that has tangible value.
When you list these items try to come up with their real value and not the price you want to sell those things. Your major assets gained a lot of value over the years and can be sold if you’re ready to liquidate them or in a bad financial situation.
In addition to gathering information about the value of your major assets, you need to add information about other savings outside of your retirement accounts. List all your bank checking and savings accounts, investment accounts, stocks or bonds, CDs, and money market accounts.
List everything you owe. This should include mortgage balances, car loans, student loans, credit card debt, and any other debt or loan you may have.
Your net worth
Calculating your net worth is quite a simple task. Calculate the total of your assets and subtract the total liabilities/debt from that number.
Total Assets – Total Liabilities = Net Worth
You might have a negative net worth, which means you have too much debt. In this case, you need to work your way out of it as soon as possible. It will be a big mistake to start your retirement with too much debt on your hands while living on a fixed income.
3. Social Security as a retirement income
In 2020, the average Social Security benefit for a person who retires at 66 is $18,036 per year or $1,503 per month. If you’re married the combined income will be higher.
Many Americans will rely on that paycheck as a basis of their retirement income. Social Security is called a guaranteed income. And the best part of it that it will keep coming in as long as we live.
When you start organizing your finances for retirement, it’s important to know how much your Social Security paycheck is. Look at your statement from the Social Security Administration.
When you open the link to the website, sign in, or create an account if you don’t have one. Your Social Security statement will show how much you could expect to receive at a different age.
Depending on your birth date and year, you’ll see several numbers of expected income. The lowest income will be If you decide to claim your benefits at age 62, and the highest at age 70.
Whatever age you decide to retire, be careful of claiming your benefit right away and look at the numbers first. I always like the idea to retire early at age 62, but delay claiming the benefits until full retirement age, so I’ll get higher income for life.
4. Calculate your income, expenses, and cash flow.
It’s important to calculate your retirement income and expenses so you would know how to manage your spending.
List all the retirement income you expect to receive. This includes your Social Security paycheck, pension, estimated income from retirement accounts, investment accounts, rental properties, business (if you own), and a part-time job.
By gathering all information will help you to have a clear picture of what income will come from which account. Also, you should remember about a required minimum distributions (RMDs) which start at age 72 in 2020 (before it was at 70 ½).
To find out how much money you’ll spend in retirement answer a few questions:
- Where do you want to live in retirement?
- How do you want to live in retirement? What is your lifestyle?
If you know where and how you want to live it will be easier to understand your retirement expenses.
All expenses can be divided between essential and non-essential living expenses. I like to call them “need to have” and “want to have” expenses.
Essential or “need to have” expenses:
- Mortgage or rent
- Medical and other insurance
Non-essential or “want to have” expenses:
- Travel and vacations
- Hobbies and activities
You can add to this list donation to charity, gifts, or other contributions you‘re planning to have during your retirement years.
Calculate your cash flow
Calculate the total of your retirement income and subtract your estimated retirement expenses from that number.
Retirement Income – Retirement Expenses = Cash Flow
I like to calculate our cash flow because it helps to get a clear picture of our income and expenses. It’s not about how much money we’ve accumulated over the years, but how we manage our spending.
If we want to have a secure retirement and not to run out of money fast, we need to control our expenses. I want to make sure that our cash flow is positive which means we live within our means and don’t overspend.
If your cash flow is negative it means you live beyond your means and need to cut on spending. Negative cash flow can be altered by increasing your income or decreasing your expenses. I think it’s always easier to adjust your spending habits than your income.
Understanding your cash flow situation is important because it helps you to see what kind of life you can afford.
5. Re-evaluate your retirement investment strategies
While organizing your finances for retirement, it will be a good time to re-evaluate your overall investment strategies. You need to decide what is the best way to invest your money. The invested money should provide income and growth of your portfolio during retirement years.
With age, we tend to get more conservative with our investments. When we are getting closer to retirement, we start thinking about preserving capital rather than making big profits in the stock market.
It’s recommended to have a 60/40 portfolio when you’re close to retirement. But you still need to have money invested in stocks so it will grow over time. Many people make the mistake of getting too conservative by investing too much of their portfolio in bonds. But we still need to have growth in our retirement portfolio so we can beat the inflation.
On the other hand, it will be a mistake to invest all your money in the markets. When you retire and stop receiving a steady paycheck, you need to have enough cash to pay for expenses and emergencies.
I like the idea to have one or two years of money available to provide immediate income. You can use a mix of cash and other safe investments like high quality, short-term bonds or money market accounts for quick access to funds.
6. Review all insurance policies
I try to review our insurance policies every year. But when you’re ready to retire you need to look at them more closely. Depending on your policy the home insurance could cover less or more than you need right now. The same applies to car insurance. It’s a good idea to check that your car policy isn’t covering a child who moved out of the house and not using your vehicle anymore. Make sure that your insurance policies have the cost and coverage to match your current needs.
Health insurance will come at a big cost in retirement. Our health is likely to decline with age and we will need more help from the medical professionals.
Long-term care insurance is an extremely popular topic that is discussed among financial advisors. You can spend almost $10,000 a month for full-time long-term care assistance or even more if medical care is needed.
On many occasions, Roman and I discussed if we need to buy long-term care insurance. So far, we didn’t come to any conclusions. It’s insurance and it’s expensive. You may pay a premium for years and after all, never use the coverage.
But what if one of us breaks a hip later in life. Who would help with cooking, cleaning, and bathing when the other partner is old as well? And how would you pay for someone’s help? Without long-term care insurance, you will have to spend down your funds before you see whether you qualify for Medicaid.
On the other hand, we need to look at it as we look at any kind of insurance. We have been paying for a homeowner’s insurance for years and never feel sorry that we never used it. The same was with our rental property. We had landlord insurance for a 3-family rental property we owned for years. The policy we paid for was around $1 million in liability coverage. But I feel happy that the property never burned down or being damaged so we would have to use the insurance.
It doesn’t matter if we either will need care, or we will not. What matters the long-term care insurance will allow us to afford quality care when we need it. Also, it helps to reduce the financial and emotional stress that long-term care situation can impose on the family.
Putting It All Together
I’m sure that we all struggle to keep our finances in order. My biggest problem is that we have too many accounts. Lately, I have noticed that it’s getting harder to manage them. Before we retire, I wanted to make sure that we have a firm grasp of our financial situation.
My goal is to organize and simplify our finances the way we can enjoy our retirement instead of worrying about the financial unknowns. I want to have peace of mind knowing that we can manage our retirement savings wisely.
I believe that organizing your finances for retirement will help to be confident in the comfort of your next phase of life.
Have you thought about organizing your finances for retirement? Share with us your thoughts and ideas in the comments below.
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Disclosure: This information is only educational. The intent if this post is to provide a simple guideline for an extremely complicated matter. I am not providing any specific financial advice or recommendations to any of my readers.