The shift to living on a fixed income presents unique challenges and hesitations when you are approaching retirement. As CEO and president of Affinity Federal Credit Union, I've heard a wide range of concerns among our members during this transition into a new phase of life.
Fortunately, there are some effective strategies to help you manage your finances smoothly and securely.
1. Don’t retire until you can live on a budget.
One of the most significant adjustments for many people is learning to live well beneath their means. After years of steady and potentially rising incomes, the disappearance of that regular paycheck can be daunting.
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To ease this transition, I recommend adhering to a budget several years leading up to retirement to mirror what it might be like to live on a lower monthly fixed income. Living within, or ideally below, your budget helps acclimate you to the changes ahead, ensuring a smoother shift into retirement.
2. Got debt? Time to tackle it.
As you migrate to a more conservative budget, make a concerted effort to minimize or eliminate your debt — be it mortgages, car loans or credit card balances.
Using debit cards instead of credit cards can prevent the accumulation of new debts, anchoring your spending to available funds and reinforcing a disciplined financial habit. That said, odds are you will incur some debt over the course of your retirement. If you face a situation where you encounter a major expense, consult your financial professional for the best course of action to pay it off.
3. Partner up with a professional.
Your financial professional should be a trusted partner in your journey to and through retirement. It’s important to build a relationship with a financial planner or adviser well before you end your professional career. Lean on someone who understands your specific life situation and who you feel is making decisions in your best interests, assisting in your financial planning and ensuring you are on track to meet future financial and life goals.
Regular reviews of your financial plan with a professional are essential. Annual or biannual meetings can help you assess your investments’ performance and ensure you’re sticking to your budget. These reviews also offer projections for future cash flow and spending, allowing for timely adjustments.
4. Have some cash on hand (but not too much).
An emergency fund plays an indispensable role for retirees. With unexpected expenses, such as home repairs, health issues or car maintenance, having a robust savings account is more critical than ever. Ideally, this fund should be larger than it was during your working years, as recovery from large, unplanned expenses is more challenging on a fixed income.
Inflation is always a factor that significantly affects retirement planning, and for those on the brink of retirement right now, that’s especially the case. To mitigate its impact, I recommend retirees avoid holding excessive amounts of their portfolio in cash, which can erode purchasing power. A balanced investment mix, tailored to an inflationary environment, is crucial. Regularly consulting with a professional can ensure your portfolio is optimally positioned to withstand inflationary pressures.
5. Plan ahead for higher health care costs.
Rising health care costs are a prominent concern for retirees. Planning for these expenses involves understanding the full spectrum of potential costs — from Medicare to long-term care.
Budgeting for health care requires acknowledging that these costs will rise annually, consuming a larger portion of your fixed income over time. Utilizing online tools to estimate future health care costs can provide valuable guidance in this area. Review the resources available on Medicare's website and visit the website of your individual health insurer, which may also provide additional cost analysis tools.
6. Pick the right spot to retire.
Choosing where to live post-retirement is another critical decision. For some couples or individuals, it may be a very difficult one when factoring in personal relationships with family and close friends. In the end, it’s essential to ensure that you do what’s right for your overall well-being. This includes ensuring the taxes and cost of living in your chosen location can be comfortably covered by your retirement paycheck. This often-overlooked decision can significantly impact your financial comfort and stability in retirement. Take the time to consider all of the factors at play.
Wherever you settle in your golden years, personal fulfillment and well-being are paramount. Engaging in community activities, mentoring and spending quality time with family and friends are ways to enrich this life stage. Remember, retirement is not just about managing finances; it's about enjoying life to the fullest, maintaining overall well-being and finding happiness in everyday moments.
As you approach retirement, the key is to plan meticulously, adapt to new financial realities and embrace the opportunities this phase offers.
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