5 Tips to Start Retirement on the Right Foot
February 11, 2015 | Enjoying Retirement
Retirement doesn’t happen in a straight line; it comes in stages. For many, the first years of retirement are often the most active—and the most expensive. That’s why it’s important to make sure you enter your retirement with a plan that will let you enjoy your new freedom without spending so much that you can’t continue to enjoy the rest of retirement.
“Early in retirement, people tend to spend more freely, doing all the things they were too busy to do when they worked: travel, dine out more, and enjoy golf, tennis and other sometimes costly activities. Depending on their choices, spending for some retirees can even surpass pre-retirement lifestyles for a time,” says Angela DiCastri, director of Retirement Markets for Northwestern Mutual.
To help ensure you don’t jeopardize your long-term financial security, DiCastri believes it’s important to get the first years right when it comes to retirement spending. “Many people head into retirement without a clear vision of how they want to live in this next phase of life. You may be able to have a second home, a sports car or go on all the river cruises you want; you just need to identify these wants and then factor them into a realistic spending plan.”
Here are five tips to help you get started:
1. Tee off now. Planning to take up golf in retirement? Globetrotting? Sailing? Whatever your hopes for retirement, get started now to see if you actually enjoy those activities before buying a catamaran or the home with a view of the 9th hole. Test-driving planned activities in advance will allow you to assess how much time and resources you actually want to devote to these new hobbies; it also may enable you to allocate some of your current spending to necessary supplies and equipment while you’re still working and have more disposable income.
2. Factor in where you will live. Housing is one of the largest expenses retirees face. If you’re thinking about downsizing, be realistic about what it will cost to buy something else and how much you will get for your home. “Moving expenses, closing costs and even small additions, such as new furniture or carpeting, can add up,” says DiCastri. “If you plan to age in place, assume that home maintenance and repair costs will likely increase over time. Also consider what it would cost to make your home senior friendly by remodeling the kitchen and/or bathrooms now.”
3. Look before you leap. Many people fall in love with a vacation destination and decide they want to retire there. If you’re planning to make such a move, visit that place frequently and not just during peak tourist season, when the weather is best. The more day-to-day life you can experience, the easier it will be for you to assess whether you could create a new and satisfying life in that community—and the better you can estimate what it actually may cost to live there on a full- or part-time basis.
Don’t forget to consider what it may feel like to live apart from family. Many people assume that relocating to a resort-like community will ensure regular visits from loved ones. In reality, work and school schedules often limit the time they have to visit, leaving some relocated retirees longing for “home” and spending unanticipated dollars on airfare visiting family.
4. Consider taxes. Taxes don’t go away just because you pay off your mortgage or stop working. Property and school taxes alone can be hefty, and they’re likely to go up over time. To cut this drain on their income, some people move to what they believe is a lower tax-rate state or country. Before you do, consider the whole picture.
“State and local governments can vary widely in terms of property taxes, sales taxes and how they tax Social Security, pension income and retirement plan withdrawals,” explains DiCastri. “Do your research to make sure you actually end up paying less tax in a new retirement location than you do now. Similarly, if you plan to divide your time between two locations, make sure you understand residency requirements in both places so that you’re paying taxes in the most tax-effective way.
5. Plan. Use what you have learned while considering steps 1-4 to put together a plan. According to DiCastri, the biggest mistake you can make going into retirement is not having a written plan in place. Yet a recent survey by the Employee Benefits Research Institute found that only 44 percent of workers (and/or their spouses) have tried to calculate how much money they’ll need in retirement. “A well-crafted retirement plan identifies your income sources and matches your cash flow with your expenses. In doing so, it can set the stage for a financially secure future by helping you to avoid overspending, particularly in the early years of retirement,” Dicastri said.
The choices you make in the years directly before and after retirement may determine your financial and emotional well-being later in life. To help ensure you get started on the right foot, it makes sense to talk with a financial professional. According to DiCastri, the right financial partner can help you identify your goals for retirement, weigh your options and create an income strategy that will help you live the lifestyle you want for retirement.