When you retire, do you dream about exploring the world or learning a new hobby? For many families, retirement living can include splurges, especially if they plan their retirement income to support those activities.
“Retirement planning doesn’t stop when a person retires,” said Esteban Zuno, associate region manager with The Private Client Group of U.S. Bank. “Instead, as a person approaches his or her retirement date, planning should begin to switch from saving for retirement to developing a retirement income budget. And part of budgeting can include plenty of fun activities!”
Zuno worked with clients who made it their goal to travel to every continent during their retirement years. Other clients wanted to spoil their grandchildren with a special trip when each turned 18. He had one client who decided to take up pottery in retirement. She had so much fun learning the discipline; she decided to splurge on the equipment to make her own pottery in her garage.
Because these clients were involved in developing a retirement income plan, they have the potential option to budget for fun splurges, while also maintaining the lifestyle of their choice.
U.S. Bank Wealth Management developed The REAL Retirement approach to help people switch from saving for retirement to spending their retirement income. The REAL Retirement approach is a great way to develop a retirement income budget, incorporating all your income sources and strategizing for tax planning. The REAL Retirement categories are:
Retirement Resources: First, tally your Social Security, pension and annuity earnings as part of your income plan. If you’re required to take an minimum distributions on 401(k)s, include those as well. These resources have age and distribution requirements built in, and you may incur penalties if you don’t fulfill those requirements.
Earnings and Income: Next, include in your income budget your bonds earnings, dividends from stocks or distributions from mutual funds. Also include any income you may earn from working part time or from rental properties or other assets you own that may give you a source of additional income in retirement.
Asset and Investment Drawdown: If your monthly expenses will still exceed your income budget, once you combine the above two groupings, then take a look at asset liquidation options, which could potentially help you to meet your living expense needs. In this grouping, the goal is to keep your withdrawals as tax-efficient as possible. You’ll want to work with your financial and tax advisors to minimize the taxes you pay on withdrawals, while also working to maintain your tax bracket. If you have tax-free assets such as Roth IRAs, HASs and cash-value life insurance policies, put these last on your income list to help avoid the potential for crossing into a higher tax bracket.
Legacy Assets: Part of retirement income budgeting should be a consideration of anything you may wish to leave behind for loved ones. This is the final step of your planning strategy. Many retirees take this opportunity to consider any minor-age children or other people who rely on their financial support. Zuno recommends that people work with their financial advisor and estate plan advisor to make a plan for how assets can be passed on to loved ones. Keep in mind, some asset transfer opportunities may be better beneficially from a tax perspective if the transfer is made while you’re still alive. Like retirement income plans, estate plans are living documents and need to be reviewed and updated as life experiences change over time.
As your retirement years approach, or if you’re already enjoying your Golden Years, it’s important to work closely with your financial, tax and legal advisors to determine how you can splurge, have fun and also maintain the lifestyle you want to live.