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9 Ways to Organize and Simplify Your Finances

woman's hands - dollar bill - organize-simplify-your-finances

The modern lifestyle can be very chaotic and stressful. It is no wonder we are overwhelmed by our busy schedules, family responsibilities, and finances.

Money management can be complicated on all levels. Everything from budgeting, retirement planning, savings, investing, debt, and even types of insurance needed to be organized and managed.

I do not know about you, but I have found that often enough finances are in control of my life. I get overwhelmed with so many parts needed to be managed to keep my money goals on target.

Fortunately, there are many ways to manage money without getting overwhelmed. Learning how to organize and simplify finances eventually will help you stress less about money and focus on what is important in your life.

If you feel that your financial life is out of control, I encourage you to try one or two ways to organize and simplify your finances.

1. Organize financial paperwork.

It is hard to simplify your finances when you do not know where to find your financial papers at the last minute. And in case something happens to you does your family know where to find your important documents?

That is why the key to keeping your finances simple is to keep them organized in one place.

Collect all your bank statements, bills, legal documents, mail and set up a filing system in a way it suits you. The filing system should be simple and yet effective to keep track of your financial papers. I keep all my papers in simple manila folders and hanging file folders inside a 3-drawer file cabinet. All papers are divided into categories:

Expenses
Credit cards
Banking
Medical
Insurance
Investments
Tax returns
Miscellaneous

Once a year I go through all folders and get rid of everything I do not need anymore.

2. Track all financial accounts in one place.

It is hard to keep a track of everything you own if you do not have a system. If you want to simplify your finances, you should create a list of everything you own. Seeing all your financial information in one place will help you get a big picture.

Start the process by gathering your financial information in one place. This way you will see all your expenses, assets, debts, and liabilities at glance. Whether you want to list them down in a traditional ‘pen and paper style’ or create an Excel spreadsheet, call it “an inventory of your accounts”.

You can also do it with a personal finance app like Mint. This popular free online financial tool allows you to link all your accounts to get a real-time view of your financial life in one place. Also, this app helps you pay bills in one place, gives you updates on your payments, gets reminders on your due dates.

I personally use a combination of Mint and Excel spreadsheet and it works well for us.

MINT

3. Consolidate your accounts.

One of the easiest ways to simplify your finances is to consolidate your accounts. Many people still like to have multiple savings and checking accounts and keep money in several different banks. In addition to that, you may also have a mortgage, retirement and investment accounts, and insurance products. It is a lot to juggle.

I believe it makes your financial life is complicated. If you want to simplify your finances, you should keep your accounts to a minimum.

I even recommend closing your old accounts including your old retirement accounts. If you changed your jobs a few times, you might still have your 401(k) money with previous employers. And if you forget to roll over this money to your IRA or Roth IRA, you may even forget to track thousands of dollars invested in old retirement accounts.

Save yourself the headache of dealing with multiple savings and checking accounts by closing those that are not useful and consolidate them in one bank account. If you have fewer accounts to track, it means you have less hassle remembering logins, websites, and tracking your money.

4. Pay your bills automatically.

If you hate keeping old receipts and bank statements, you should take advantage of automation and go paperless. I personally do not remember the last time I mailed off a check to pay our bills.

table-globus-smartphone-organize your finances

There are many benefits of paying your bills online including convenience and security. By going online, you will not be using envelopes, stamps, and checks as much as it was popular in the past. Moreover, it will be easier to track your payments using a lot of tools like reports and alerts when you sign up with an online service. The best part of automation is to reduce the stress of money management and make it less complicated.

All our family bills are set up to be paid automatically out of our checking account. I just have to make sure I added money to that account before the bills are due. Even though I keep an eye on all our transactions, but I never have to worry about being late on bill payments.

5. Automate your savings.

Another great way to simplify your finances is to automate your savings. Learning how to automate your savings will help you stress less and save more. Every time we receive our paychecks, a lump of it automatically is going into our retirement accounts. Another portion of our income is deposited into our savings account and then the rest is going into our checking account.

We use our savings account for keeping our emergency fund money, and funds for future travels. The checking account is where we keep the money for our monthly bills and living expenses. I like to know that our income gets distributed in a few simple accounts. By automating it, I always know I am going to be saving a certain portion of our income each month.

Another great thing I like about automating our savings is that even a small amount of money will grow up over time. I started with a $50 automatic transfer from checking to savings account once a month, then increased it to twice a month. The automation really helped to raise our travel fund from $1,000 to $8,000.

6. Simplify your investments.

The simplest way to invest your money is through index funds. Index funds are low-cost and low-risk investments because they follow the market indexes. But you still have to deal with asset allocation and portfolio rebalancing.

If you are a new investor who likes hands-off investing experience, try using Robo-advisors.

I recommend checking out Betterment as a Robo-advisor.

Robo-advisors are known as online advisors or automated investing services. Robo-advisors are much cheaper than a human financial advisor. These online services make it easier for you to start working on your financial goals. You will get help with your investments at a low cost and with low account minimums.

If you want to learn more about Robo-advisors, I recommend reading What is Robo-Advisor and How Do They Work from Balance.

7. Pay down debt.

Carrying debt on a few credit cards makes your financial life stressful. When you face thousands of dollars in credit card debt you do not have enough money to save for retirement or to pay off your mortgage more quickly.

Set your financial goal to get rid of high-interest debt as quickly as possible. You can use recommended debt snowball or debt avalanche strategies to pay down your debt.

8. Package all services in one place.

Consolidating your expenses in one or two places is another way to simplify your finances and save some money.

Many companies produce and supply multiple products and services. They sell these products or services separately or in packages or bundles, at a “bundle price”. As a result, you can buy them together as a package at a lower price than what you would pay for them individually.

You can bundle together services like your internet, cable TV, and cell phone. You can also package together with all your insurance needs with one company such as homeowner and car insurance.

The best part is that you can save money by getting a discount from your provider for combining two or more services on one bill. And you can reduce the number of bills to pay each month from several to just one.

9. Reduce the number of your credit cards.

Another way to simplify your finances is to get rid of numerous credit cards.

Once, we used to have nine credit cards and it was way too complicated to keep track of our spending. We used credit cards for promotional money transfers, to earn cash back, and other rewards. At some point, it became a nightmare to pay off those balances.

Eventually, we trimmed down the number of our credit cards to just a few. We prefer to use credit cards with no annual fee and cashback rewards. And we do not worry about high interest rates because we always pay the balance off in full each month.

Best Credit Cards Comparison by Forbes

Final Words

If you want to simplify your finances, it does not have to be complicated. Just making small changes as I have described in this post can make a huge difference in your relationship with money.

Do you feel frustrated dealing with your finances? How do you simplify your finances?

Remember to share this post if it helped you!

Understanding Different Types of Retirement Accounts

by Maggie 2 Comments

money banknote - hourglass-types of retirement accounts

The basic idea behind any retirement plan is to put some money into different investments and to live off what those investments generate in retirement.

How much your retirement portfolio will grow depends not only on the amount of money you save but also on your choice of retirement accounts.

You can choose from three different types of retirement accounts:

The 401(k) and traditional IRA. These are tax-deferred accounts.
The Roth IRA and the Roth 401(k) plan. These are tax-free accounts.
Brokerage investment or savings bank account. All earnings on your investments are taxable.

The most common ways retirement accounts are opened:

Through your employer
Through yourself, if you are self-employed
Through financial institution on your own

Employer-Sponsored Retirement Account – 401(k)

Account

401k plans are retirement plans offered by employers. And a 401k account is tied to your employer because the employer sponsors the plan. A 401k is just the name of your retirement savings account where you save money for retirement.

Contributions

A 401(k) plan is the most common tax-advantaged retirement plan. Your contributions to the plan are made automatically with your pre-tax dollars. Compared to other retirement plans, a 401(k) plan allows high contribution amounts of up to $19,500. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $26,000. (in 2021). Your employer may or may not match a portion of what you invest. But if an employer match is available take it because it is free money for you.

The best part is that your contributions will grow tax-free for many years which allows the compound interest to kick in and start working its magic. After all, a 401(k) plan helps your retirement savings grow as in a tax-sheltered account.

Withdrawals

You will start paying taxes on money invested only after you retire. If you withdraw money before the age 59 ½ you will pay a 10 percent penalty fee and taxes on your withdrawal. At age 72 you will be forced to start taking money out of tax-deferred accounts because IRS is eager for you to pay taxes on the money. If you do not take your RMD (Required Minimum Distributions) on time, you will face a 50 percent penalty fee.

I recommend reading my posts:

Self-Employed Retirement Account – Solo 401(k)

Solo 401(k) or Self-Employed 401(k) is an individual retirement plan for someone who is self-employed and does not have any full-time employees besides a family member. Solo 401(k) rules are similar to a regular 401(k), but a bit complex to set up. You can open an account with any online brokers. But you will need an Employer Identification Number (EIN), an account application, and the company rules for your 401(k).

Traditional IRA Retirement Account

Account

The traditional IRA, which stands for Individual Retirement Account, works the same as a regular 401(k), but no employer is involved. You can open an IRA on your own with any online brokers. Online brokerages such as Fidelity, Schwab, and Vanguard are good choices. And you can have both 401(k) and IRA accounts.

Contributions

In 2021 you can contribute up to $6,000 a year or $7,000 if you are over 50. The money that goes into an IRA account must be from the earned income (money you make from working and not as gift money).

The contributions for IRAs are much lower than for 401(k) plans. And there is no employer matching contribution since there is no employer sponsoring the plan.

Traditional IRA and Roth IRA rules from IRS

Withdrawals

If you take money out of your IRA before you reach age 59½, you will face a 10 percent penalty fee (the same as with a regular 401(k). In addition to that, you will have to pay federal and state income taxes you owe on the withdrawal.

There are a few exceptions to this rule. You can avoid the penalty if you withdraw the money for the following reasons:

Buying a home for the first time
Disability
Qualified education expenses
Health insurance (if you are unemployed)
Medical expenses that were not reimbursed

At age 72 you will be forced to start making withdrawals from your traditional IRA (the same as 401(k) rules).

If you want to learn more about IRA and Roth IRA retirement accounts, I recommend reading my post: Do You Know the Difference Between IRA and Roth IRA?

Roth IRA Retirement Account

Account

Roth retirement accounts basically mean that you pay taxes upfront when you put the money into the account. But you will pay zero taxes when you take the money out.

Contributions

You are only allowed to put money into a Roth IRA if your income is below a certain limit. If you meet that criteria, your annual Roth IRA contributions in 2021 are $6,000 for people under the age of 50 and $7,000 for people over 50.

If you can contribute to a Roth IRA, it is a great way to save more money for retirement. Unlike a traditional IRA or 401(k), the IRS does not require you to make RMD withdrawals from a Roth IRA account. The money can sit and grow there as long as you want it. And it can be passed to your heirs.

Withdrawals

If you turn 59 ½ you can withdraw money from your Roth IRA tax and penalty-free. However, you may have to pay taxes and penalties on earning in your Roth IRA if you have had it less than five years.

But if you are age 59 ½ and older and met the five-year holding requirement, you can withdraw money from a Roth IRA account with no taxes or penalties.

You can open a Roth IRA account at any financial institution including online brokerages such as Fidelity Investments, Vanguard, Charles Schwab, and TD Ameritrade.

Roth IRA Contribution Limits from Charles Schwab

Roth 401(k) Retirement Account

Account

A Roth 401(k) is a type of 401(k) that allows you to make after-tax contributions and then when you retire to take tax-free withdrawals. On the other hand, a traditional 401(k) allows you to make pre-tax contributions and get taxable withdrawals in retirement.

Contributions

I recommend you check to see if your plan has a Roth 401(k) option. Everyone should be eligible if the plan has a Roth option. If your employer offers both a Roth 401(k) and a traditional 401(k) you can split the contributions. I have both accounts – a traditional 401(k) and a Roth 401(k) and I split the contributions 50/50.

A Roth 401(k) is one of the best options for you because it does not have income and contribution limits as a traditional Roth IRA. As with a traditional Roth IRA, your contributions come from your after-tax paycheck rather than pre-tax salary as a 401(k). Your contributions and earnings in a Roth are never taxed again if you follow the rules and remain in the plan for at least five years.

Withdrawals

With a traditional Roth IRA, you are not required to take RMDs at a certain age. However, with Roth 401(k) you have to start taking RMDs at age 72. The good news that you have an option to roll the money over from a Roth 401(k) to a Roth IRA.

Both Roth IRA and Roth 401(k) accounts allow tax-free growth on your retirement savings and tax-free retirement income. But there is a difference in rules for taking money out before retirement.

Brokerage account – taxable account

Account

A brokerage account can also be a type of your retirement account where you keep your savings for growth. The main difference between a brokerage account and your other retirement accounts that there are no any tax advantages.

Except for certain select investments, such as municipal bonds, all earnings are taxable. So, if you make money because your investments go up in value or receive dividends, this income will be taxed. In addition to that, you will have to pay capital gains taxes when you sell your investments.

You can open a brokerage investment account at any financial institution including online brokerages such as Fidelity Investments, Vanguard, Charles Schwab, and TD Ameritrade.

Contributions

The good news that there is no limit to how much you can invest in a brokerage account. This account works great for people who want to build wealth through the stock market.

Withdrawals

Also, there is no penalty fee if you decide to withdraw your funds before the age of 59 ½ or forced RMDs at age of 72.

Related Content:

Putting It All Together

Retirement accounts like 401(k), IRAs, Roth IRAs offer us different tax benefits. Even there are differences between these types of accounts, they basically work the same way in everything else. The main idea is that you make contribution throughout your life so that when you retire you have enough money to live off your investments.

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Planning for Retirement in Your 50s

by Maggie 4 Comments

Woman-car-retirement planning in your 50s

We have heard so many times that the sooner you start saving for retirement the better off you will be in your old age. But when you are in your 20s and 30s you are not in a rush to save for retirement. It is easy to fall into a trap thinking you have plenty of time to do that later. Suddenly, you are in your 50s and have not saved enough for your golden years.

Life has presented you with some challenges. You were busy with kids, saving for their education, straightening out debts, and trying to pay off a home mortgage. In the end, there was never that much money left. But do not despair, because it is not too late. If you are in your 50’s and fell behind on your retirement goals, there are things you can do to boost your retirement savings.

Use these smart steps to find out how to catch up on planning for retirement in your 50s.

1. Retirement projection

Start with figuring out how much money you will need to retire. First, find out how much income you will need to cover your retirement expenses.

Financial experts suggest that you need about 80 percent of your pre-retirement income to maintain the same standard of living in retirement.

Suppose my current annual income is $70,000. Multiply that number by 80 percent ($70,000 X 0.8 = $56,000). So, I will need around $56,000 in retirement to live the way I do today. And if I have expensive hobbies like traveling, I will need a higher number.

Next, figure out how much income you will receive from Social Security. You can contact the Social Security Administration to find out how much will be your benefits at age 62, full retirement age, and at 70. For today, I use the estimated average Social Security retirement benefit in 2021 which is $1,543 a month or $18,516 a year.

Then, subtract your Social Security income from your projected retirement income and you will see how much you need to provide from your savings. $56,000 – $18,516 = $37,484 a year.

So, in our simple case, I will need $37,484 in annual income to cover the income gap. The money to cover that gap should come from 401(k), IRA, Roth IRA, and other retirement savings.

5 Easy Steps to Calculate Retirement Income Gap

Also, you can use an online retirement calculator for retirement projection. Take a few minutes to enter your personal information, see the numbers, and where you stand today.

AARP Online Retirement Calculator

But I think the best way to find out how much money you need to retire is to create a retirement budget based on your current and future expenses. You might have a general idea of what you spend now. But you will be better prepared if you have a clear picture of your expenses today and how that might change in the future.

If you do not know how to create a retirement budget or organize your finances for retirement, I recommend reading my posts:

2. Minimize your debt.

When you are in your 50s make it a goal to pay off your credit card debt, student loans, car loans, and any personal loans before your retirement date. Do everything you can to retire debt-free and even pay off your mortgage if possible.

When you stop working and start living on a fixed income you will need to stretch those retirement dollars as far as you can. How can you enjoy your retirement if you must spend a portion of your retirement income to make a mortgage or debt payments each month?

Credit cards

If you are carrying a high-rate credit card debt you are putting a lot of pressure on your finances. Those high-interest payments can eat away your ability to save. I recommend working on a debt payoff plan if you have more than one credit card.

There are two most popular debt payment strategies – the snowball method and the avalanche method.

The snowball strategy works by paying off the credit card with the smallest balance and then working your way up until all credit card debt is settled.

The avalanche strategy allows you to pay off your highest interest rate debt first and then work it down. I recommend focusing on your highest-interest debt first because the longer it takes you to pay it off, the more money you will pay towards interest.

And if you can help it, do not add any more debt to the pile while paying off old debt.

How to Pay off Debt Before Retirement

Mortgage

If you still making mortgage payments now it is time to figure out how to pay it off in full before you retire. You do not want to carry that financial burden while living on a fixed income. Look at your mortgage balance and try to figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly.

Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments. The whole idea of paying off your home loan earlier will help you eliminate debt faster and start saving more for retirement. In addition to that look into refinancing your mortgage to get a lower rate and to reduce your monthly payments.

When you plan for retirement in your 50s, getting out of debt should be your first priority. At this age, you have to make the most of your working years and build or increase your nest egg within the next 10 to 15 years.

3. Maximize your retirement savings.

Being in your 50s is an ideal time to look at your retirement plans and financial goals. You are close enough to retirement to have a realistic idea of how you want to spend your golden years. Yet you are far away to tweak your financial goals.

charts-laptop-plan for retirement in your 50s

The closer you are to retirement, the less time you have for compound interest to kick in and start working its magic. That is why the ultimate goal in your 50s is to stash as much money as possible in your retirement savings.

Whenever possible, increase your retirement contributions up to the maximum allowed in retirement plans such as 401(k), IRA, and Roth IRA. The best advice is to start spending less so you can put more money into your retirement savings.

The 2021 contribution limits are:

$19,500 for 401(k) retirement plans. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $26,000.
$6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people age 50 or older is $1,000. So, you can save up to $7,000 with your pre-tax money (IRA) and after-tax money (Roth IRA).

When you are getting closer to retirement, maximizing your traditional 401(k) and IRA accounts is important but not always enough. While you are still working you can make it a priority to save even more money in your Roth IRA account, emergency fund, and may be taxable investment funds if possible.

A Guide to Understanding a 401(k) Plan

Another way to increase your retirement savings is to work longer. The goal is to make the most of your working years. You need to maximize the time you have left. Earning an income for a few more years could improve your financial security in retirement.

4. Spend less and save more for retirement.

I am sure you may not like to hear this, but the fastest way to save more money for retirement is to cut your expenses. If you start practicing how to curb your spending and live on less money today, it will make your life easier in retirement.

Many people in their 50s enjoy the peak of their salaries. The kids are gone, parents become an empty nesters and start spending more on luxuries. It is easy to get used to a luxurious lifestyle. However, it will be tricky to save money and even to retire if you let your spending get out of control. After all, the less you spend the more you save.

15 Ways to Live on Less in Retirement

5. Think about where to live in retirement.

When you are only 10 to 15 years from retirement, you need to think about where you will live because it will affect your living expenses.

houses on lake and mountains -where to live in retirement

Housing is expensive. We all know that it takes a big chunk of our income to pay for property taxes, homeowner insurance, utilities, maintenance, and mortgage. Even with no mortgage payments, housing will be your biggest expense in retirement and it may eat up a big chunk of your retirement income.

I am sure you live in a lovely home. And I know that you love your home and have a lot of great memories of raising your family there. But if it is in a high cost of living neighborhood and expensive to maintain, you need to downsize and move to a place where you can afford it. Otherwise, you will run out of money fast.

There are a couple of housing options to consider before you retire:

Sell your big house in an expensive location and move to a smaller house or condo in a low-tax state. In this case, your living expenses will be reduced, and you might have some extra income to pay for things you love to do in retirement.
Stay in your town but move to a smaller home or condo. Having a smaller place to maintain will cost you less money.
Sell your house and rent an apartment in a big city. But if you want to live closer to the museums, art galleries, concerts, and festivals you should be financially prepared to spend more money because retiring in a booming metropolis can be pricey.

If you want to learn more about housing options, relocating, and downsizing I recommend reading my posts:

6. Protect yourself and those you love.

Planning for retirement in your 50s when retirement is on the horizon, make sure you have insurance plans in place to protect yourself and your family. Have you thought about how to protect yourself as you age and how to help your family care for you if you need it? When the time comes that you need assistance who will manage your finances, your medical care, and your regular day-to-day life?

young and old women in a park-healthcare in retirement

I understand that these are difficult topics to discuss. But it is a part of reality to grow old. And if you love your family you will plan for it. So your loved ones will not struggle and may have to scramble to care for you.

I write often in my articles about the cost of medical expenses in retirement. I want to remind my readers that healthcare is the second biggest expense in retirement after housing and you need to plan for it. Medicare is not free. It does not cover all your medical expenses and does not pay for long-term care.

Long-term care insurance is the most recommended way of planning for future expenses. It will cover nursing homes, assisted living facilities, and in-home care. It will help you not to be a financial burden on your family if that time comes. And you do not want to leave your husband or wife with nothing because the entire nest egg was used up taking care of you.

Putting It All Together

You are in your 50s and feeling the urgency of doing everything you can to have financial security in retirement. If you are behind on your savings and might be feeling the pressure, I want to remind you that it is never too late to start planning and saving for retirement.

The longer you put off dealing with your financial situation, the farther away you will be from your retirement dreams. So, do not delay planning for your next phase of life and take the first step today!

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Tips for a Smooth Transition to Retirement

by Maggie Leave a Comment

woman in purple dress with field flowers - smooth transition to retirement

Retirement is a major life transition. And all transitions come with adjustments.

Life changes after retirement. Everything work-related is gone. Everything we got used to is gone. There are no more schedules, early commutes, and daily routines.

Most of us imagine life in retirement to be like a delightful vacation – no alarm clock, no schedule, no deadlines, and no stress. Just sleeping in, having a morning coffee on a deck, reading a book, going for a long walk, or staying up late with a glass of wine. However, we need to realize that transitioning from a work-oriented lifestyle to retirement includes a big adjustment.

Unfortunately, a honeymoon period is often followed by a feeling of disappointment. Sooner or later, it might be a big contrast between expectation and reality. No wonder it will take time to find your own way to a new life in retirement, and you need to be prepared for that challenge.

I have created a list of helpful tips for a smooth transition to retirement. Try these tips to create a new life for yourself.

Prepare for ups and downs.

The first year of retirement will be filled with bumps and adjustments no matter how well you are prepared. Do not expect the transition from your 30 or more years of work to retirement to happen without stress and anxiety.

There are going to be surprises and disappointments down the road before you settle into something comfortable. There may be times when you feel lonely, isolated or a bit lost, which is normal.

Like many other life transitions, retirement comes with emotional and mental adjustments. Your transition to retirement will not happen overnight. Most retirees will go through stages of emotions when adjusting to a new life. Give yourself some time by understanding that this will be a process.

Do not spend your time dwelling on the thoughts about the end of your career, loss of identity, loss of social connections, and purpose in life. Accept that you have done all you can working for many years and focus on your next phase of life. Make peace with it and move on to your next challenge.

I recommend reading my post: 5 Common Emotional Stages of Retirement

Develop a routine.

We all need structure in life and our job helped create that structure for many years. When we stop working the structure is gone.

What happens when you retire? It is Monday morning, but you do not need to go anywhere. There is nothing planned. There is no alarm clock, no morning rush, and no early meetings or deadlines.

pastry and coffee mug on a table - transition to retirement

The first few days or weeks will be exciting. You can sleep late, read in bed, or catch on your favorite Netflix shows. But I am sure that by the end of the week or month you will start feeling bored, isolated, and maybe a bit depressed. The fun is gone, and you will be glad to go back to something more meaningful in your life.

That is why you need to develop a routine and create a “new normal”. Some people love to have a daily routine, while others cannot bear to have everything predictable. But without proper planning and developing daily activities to get you up every morning, your retirement life will be dull.

Set goals.

Setting up personal goals can be a powerful tool for finding purpose in life and helping you with the transition. Your retirement goals are maybe a little bit different than when you were working.

Your pre-retirement life was structured around achieving mostly professional and financial goals. After you retire, you still need to set goals for yourself to ensure you feel a sense of purpose and accomplishment.

Overall, goals give us a sense of direction. And with direction comes a sense of purpose. Make a list of your goals the same way you make a ‘to do’ list. Think about goals you want to achieve in six months or a year. Writing down your plans on a piece of paper will help you stay focused on a new life.

If you do not know how to create goals in retirement, I recommend reading my post: How to Create Retirement Lifestyle Goals

Find your path.

How you transition from the workplace to retirement will depend on many factors. It will depend on your financial situation, your health, and your vision of what retirement will be like. And you will set yourself for a smooth transition to retirement if you plan for that ahead of time.

fisherman on a beach - smooth transition to retirement

Think about whether you want to spend your free time doing something similar you did before retirement, or if you want to try something different. Write down a list of interests and activities that brings you joy even some of them you might put on the back burner for a while. Do not forget to include in your list new things you like to learn.

Discovering something new you have never done before can be a great way to step out of your comfort zone. Now that you have more time, there is a whole new world out there waiting to be discovered.

All those things we regret not having time to do during our working years can act as an inspiration when we transition to retirement. There are endless possibilities to explore once you have time and the freedom of retirement. It can be sports and travels, learning a new language or instrument, starting an art project, or home renovation.

If you want to learn more about what to do in retirement, I recommend reading my post: 15 Ideas What to Do When You Retire

Keep in touch with your friends from work.

Losing your network of co-workers and office friends can be hard. Eventually, life in the office will go on without you. Even though you are retired, it does not mean you have to lose contact with the group of your office friends completely.

A simple email, text message, or phone call can lead to regular catch-up meetings with your friends from work. Also, you can make arrangements for lunch or dinner dates once a month to stay in touch with your ex-colleagues. Most workplace friends will be happy to catch up with an old friend they have not seen for a while.

Once you retire, it is easy to become involved in other activities outside of the workplace. But keeping workplace friendships alive during retirement can help you mentally adjust to life without work.

Focus on your health and fitness.

We should all aim to stay fit and healthy to enjoy retirement. There are so many ways to be physically active by walking, gardening, exercising, swimming, hiking, etc. If you have not made exercise a normal part of your life while still working, retirement is a good time to develop this habit. Just going for a walk in a park or trail can do wonders for your mood.

Lately, practicing meditation as a strategy to relieve stress and anxiety has become more popular than ever. I do not know how often you should meditate, but some articles are suggesting that 10 to 20 minutes of meditation a day can be very beneficial for your well-being.

What you eat and how often you exercise will impact your health. Being active and eating healthy food can add more years to your life and save money on future medical bills. Make sure that you eat regular meals instead of snacking if it was your habit while at work.

an omelet and potatoes on plate - focus on eating healthy in retirement

Do not forget to go for a regular health check-up because prevention is better than cure. Regular visits to your doctor might help to prevent heart disease, stroke, diabetes, and some types of dementia.

Get your finances in order.

You will set yourself for a smooth transition to retirement if you get your finances in order before you retire. It will be easier to adjust to a new life without a regular paycheck if you know what you will have to live on.

Look at your current spending and figure out what you need in your new life and what you do not. You might learn that some of your expenses will decrease, but some will increase with time.

There is no need to spend money on business clothes, commute, take-out lunches, and other work-related things. But you will want to spend more money on travels, activities, and hobbies. Unfortunately, your medical expenses will increase with time.

I recommend creating a retirement budget that will help you see how much money you need for fun and entertainment and how much to cover your living expenses. You might discover you need to keep working longer or take a part-time job to cover your new lifestyle in retirement. Or you might learn you have enough money saved and can retire early.

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Final Thoughts

Most of us look forward to retirement as a time to relax and enjoy our golden years. Finally, we can do whatever we want and when we want. But the transition from work life to retirement comes with its own challenges.

Many people will learn how to adjust to retirement life in different ways. Everyone’s path will be unique. But you will know how to deal with challenges if you are prepared. Following the tips above will help you adjust to retirement better so you can feel happy during your new phase of life.

Have you thought about transitioning to retirement? Do you feel prepared for your new phase of life? Share your thoughts in the comments below.

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Everything to Know Before You Retire

by Maggie 2 Comments

Woman at computer - things to know before you retire

Retirement is a life-changing event. And like many things in life, preparing for retirement requires a lot of planning. You do not want to be one of those people who want to retire, but when that day finally arrives, they just let it happen. You want to be smart and invest time in planning and preparing for a big day.

Getting closer to retirement can be both exciting and stressful. You need to know if you are financially ready. And you need to understand how you will spend your days when you stop working.

Retiring without a plan can be disadvantageous. The better you are prepared and see what you are retiring to, the more successful you will be at this transition. Sometimes a step-by-step guide or “to do” list can help. I have created this post with all the things you need to know before you retire.

1. Know your financial situation and retirement needs.

The first step is to evaluate your finances. I read that new retirees have some financial anxiety related to the fact that they no longer earning a regular paycheck. The Baby Boomer generation is redefining what senior living and ‘retirement’ means.

The Boomers want more out of their retirement lifestyle – more activities, more wellness, and sometimes more of everything. But all these luxuries cost money. Not to mention ordinary bills for food, transportation, utilities, medical insurance, and taxes that must be paid every month.

Calculate what you need financially to support your retirement lifestyle.

You should have enough saved to live on 80 percent of your annual pre-retirement income. This number is a good rule of thumb if you do not plan on making any major budget changes.

When you retire you do not need a lot of things that you did when you were working. The costs of commute, take-out lunches, and business clothes will go down. But you will start spending more money on travel, hobbies, and activities. And your medical expenses will increase with time.

You might have a general idea of what you spend now. But you will be better prepared if you get a clear picture of your current cost of living and how that might change in the future.

The best advice is to create an estimated retirement budget based on your current and future expenses.

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Get a clear picture of your retirement income.

money bills & calculator - know your financial situation

When you are working, you probably have a single employer and a single source of income – your salary. In retirement, everyone has different sources of income. As a retiree, you receive income from multiple sources: Social Security, pension, part-time job, or rentals.

Another source of income will come from your nest egg – investments and retirement savings:

Tax-deferred accounts – 401(k), IRA
Tax-free – Roth IRA, Roth 401(k)
Taxable investment accounts
Taxable bank checking and savings accounts

You need your nest egg to last through the next 20 or 30 years. Therefore, it is recommended to withdraw a safe 4 percent from your retirement portfolio.

For example, if you have $500,000 in your retirement funds, you can spend roughly $20,000 ($500,000 x 0.04) per year when you retire. Add this number to your Social Security, and calculate if it is enough to cover all your retirement expenses.

According to the stats, the average Social Security benefit in 2020 was about $ 1,514 a month, or about $18,170 a year.

To calculate the retirement income based on the numbers above:

$20,000 + $18,170 = $38,170 a year or $3,180 a month.

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Know your withdrawal strategy.

Do you know how much income you can pull from your nest egg? A good starting point for many retirees will be a well-known rule of thumb – the “4% rule”.

The 4 percent rule refers to your withdrawal rate. If you have a well-balanced retirement portfolio (60 percent stocks and 40 percent bonds), you can withdraw 4 percent of your account balance.

For example, if you have $500,000 saved in retirement funds you can withdraw 4 percent of that amount – $20,000 in the first year of your retirement. Then, you should adjust that number every year for inflation. But following this rule should help you not to run out of money for at least 30 years.

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Think about your tax strategies.

We still need to pay taxes in retirement, but not all sources of income are taxed the same. Withdrawals from tax-deferred accounts such as 401(k) plan and traditional IRA will be taxed as an ordinary income.

Withdrawals from Roth IRA and Roth 401(k) plan will be tax-free. If you want to withdraw money from taxable investment accounts, you will have to pay capital gains taxes.

In addition to taxes, you need to remember about required minimum distributions (RMD). You will face this requirement when you reach the age of 72.

By the US tax law, you are required to start taking withdrawals from your retirement accounts such as 401(k) and IRA. The amount you must withdraw will be determined by the IRS. If you have more than one retirement account, you need to withdraw money from each account.

You need to remember that RMD withdrawals might push you into a higher tax bracket and you need to plan how to pay for additional taxes.

Know your medical expenses and long-term care coverage.

You will become eligible for Medicare at the age of 65. If you plan to retire before age 65 you will need to find a separate plan to cover your medical expenses.

Many baby boomers who are close to retirement still believe in free Medicare. I assume people do not do enough research to understand that Medicare does not cover all your medical expenses.

Medicare does not cover premiums, deductibles, co-pays for doctor visits, dental and vision care, long-term care, personal care, and other expenses. It is important to remember that healthcare is the second biggest expense in retirement after housing and you need to plan for it.

We all know that the healthcare cost is rising. According to recent data from Fidelity, the average out of pocket healthcare cost for a 65-year-old couple will be close to $285,000 instead of $265,000 as it was a few years ago. And that number does not even include long-term care costs.

2. Expect to go through the emotional stages in retirement.

woman - rocky beach - things to know before you retire

Most people go through an emotional process when adjusting to retirement. In the beginning, there is a feeling of freedom and being like on a vacation that is going to last forever. Then, after a few years of fun and enthusiasm, you might start feeling bored.

You will learn that retirement is not a constant vacation. Eventually, you will realize that you have to fill up your days with something more meaningful than just traveling or playing golf.

It is good to be mentally ready for your new phase of life. You do not want to realize that most days you have nothing special to look forward to when you wake up in the morning. Or you do not have any reason to leave your house during the day. Or deep inside you wish you were not retired.

Like many other life transitions, retirement comes with emotional and mental adjustments. If you learn more about the emotional stages of retirement you will know what to expect. That knowledge will help you to better navigate the transition to retirement.

3. Structure your days in retirement.

Before retirement, your life has a predictable routine. The alarm goes off, you take shower, have breakfast, pack your lunch, and head out the door. Your job gives you focus and discipline and forces you to get up every morning. Work takes priority and everything else in life is scheduled around it.

But when you retire, there is nothing but time. Thus, you need to replace the established routine with something new. Waking up and trying to figure out what to do each day can be depressing.

You need to create a new routine that helps you plan your days otherwise you have no reason to get up every morning. It could be a hobby, a sport, a new skill, a part-time job, or volunteer work. Do not go to retirement without having a plan about what you are going to do to stay busy.

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4. Stay socially active and grow your friendship.

After many years of meeting people at work and seeing them every day, it might not be possible to keep up with them when you retire. You might feel isolated from your friends. You might start drifting through the days without much to do if you do not get socially connected with other people.

You can stay connected with your old friends by planning social events. If you are friends with other couples, invite them over for dinner or board games once a month. For many people, their social life relates to their work. However, you can do many things to improve your social life in retirement.

Take advantage of your free time in life to make new friends. It is not hard to find a volunteer job, join a group in the local community, or start taking a class at a senior center. Another thing you can do is to start a new club or join the club. It could be a reading club, a walking club, or a gardening club.

Staying socially active will restructure your daily routine. It will help you to feel that you are doing something meaningful beyond watching Netflix, doing crosswords puzzles, or reorganizing the house.

Putting It All Together

I am sure you have thought a lot about how you will enjoy your life in retirement. But there is a good chance you never thought much about how to transition from the workplace to retirement.

The key to a happy and comfortable retirement is in planning and preparing for it. It includes not just financial planning but envisioning your life in retirement. The more time you spend to know your retirement lifestyle goals, hobbies, and activities, the more successful you will be at this transition.

And If you do it right it might be the best time of your life!

Are you ready to retire? Do you have a clear picture of your retirement? Share your thoughts in the comments below.

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