Financial literacy covers a broad range of topics, including budgeting, saving, investing, and retirement planning. However, your financial literacy broadens to cover circumstances that weren’t as important during your working life once you retire. For example, income declines typically in retirement, while costs may remain constant or even grow, depending on your lifestyle and overall health.
Here are seven crucial subjects to learn if you wish to avoid financial pitfalls in retirement.
Social Security
You’ve been paying into Social Security since your first payday. Still, as you near retirement, you should plan your Social Security withdrawal strategy. Your Social Security benefits partly depend on how much you earned throughout your working lifetime. You should also consult a tax or financial professional to determine if you should start benefits early, at full retirement age (FRA), or even later.
Medicare is a complicated system of health insurance for seniors. To use it efficiently, you must understand how it works. Medicare has two fundamental portions, A and B, covering hospital and medical costs. Part B has a monthly premium. If you need prescription medication coverage, you can add Part D. Medicare Advantage (Medicare Part C) is a private company’s version of Original Medicare. You’ll probably need to consult an expert to understand Medicare’s financial implications with so many options. Notably, neither Original Medicare nor Medicare Advantage is likely to cover care outside the US.
Required Minimum Distributions (RMDs)
As you’ve paid Social Security taxes during your working life, you’ve also contributed to your retirement accounts. But you can’t keep your money in them forever. Traditional IRAs and 401(k) plans demand annual distributions beyond a specific age to avoid a 50% penalty tax. Congress has extended the deadline for taking RMDs to April 1 of the year after your 72nd birthday. Since Roth IRAs are funded after-tax, they don’t require you to take minimum distributions.
Taxes
Taxes are easy if you have a paid job. Generally, your company will deduct taxes from your paycheck, while all you need to do is supply your W-2 information when filing your taxes. During retirement, you may get many forms like 1099-Rs and K-1s. Some of these may have different tax implications, so you should familiarize yourself with them before retiring.
Expenses
Even if you’re used to budgeting, your retirement budget is likely to vary dramatically. For instance, many retired people have already paid off their mortgages. However, some expenses, like medical bills, are likely to climb, even with good insurance. Other costs will vary based on your lifestyle. Some retirees increase their travel and dining expenses, while others reduce them instead. Budgets differ significantly from one person to another, but they often shift after retirement. Be prepared and aware that your retirement costs might increase or decrease drastically.
End-of-Life Planning
Nobody wants to talk about the end of their lives, yet it’s a necessary step in financial preparation. First, you should create a will and/or trust to identify who will inherit your assets after you die. You may also consider consulting an estate attorney about optimizing the value of your asset transfers to heirs. Nonfinancial considerations include preparing instructions for end-of-life planning in advance if you become disabled. For example, you might want to sign an advance directive, such as a durable power of attorney for healthcare, which authorizes someone else to make medical choices on your behalf.
Asset Allocation
You’ve probably heard of asset allocation in your pre-retirement years, whether in a 401(k) plan or your personal investing account. However, as you approach retirement, you will almost certainly need to revise your asset allocation, which should have served you well during your working years. You will have fewer years to recover from a slump in your assets in retirement and less money to contribute to your account while markets are down.
As a result, many financial consultants may advise you to adjust your portfolio toward more conservative assets as you become older. As each person’s financial position is unique, you should assess your income, spending, and financial requirements, maybe with the help of a financial counselor, before making any significant changes to your portfolio.
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Bio:
I grew up in Dubuque, Iowa, where I learned the concepts of hard work and the value of a dollar. I spent years in Boy Scouts and achieved the honor of Eagle Scout. I graduated from Iowa State University and moved to Chicago and spent a few years managing restaurants. I then started working in financial services and insurance helping families prepare for the high cost of college for their children. After spending years in the insurance industry, I moved to Arizona and started working with Federal Employees offing education and options on their benefits. I became a Financial Advisor / Fiduciary to further help people properly plan for the future. I enjoy cooking and traveling in my free time.
Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice filed, or is excluded from notice filing requirements. BWM does not accept or take responsibility for acting on time-sensitive instructions sent by email or other electronic means. Content shared or published through this medium is only intended for an audience in the States the Advisor is licensed in. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this transmission is strictly prohibited. If you receive this communication in error, please immediately notify the sender. The information included should not be considered investment advice. There are risks involved with investing which may include market fluctuation and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making an investment decision.
