Key Takeaways
- Basic financial management practices like goal setting and budgeting are a lifelong endeavor.
- Investments should be simple to explain with low expenses and above-average performance.
- RMDs are mandatory withdrawals from tax-deferred savings plans to spend, gift, or resave.
- A retirement “paycheck” can be created with annuities, Social Security, pensions, RMDs, etc.
- Older adults can save money with senior discounts and should be vigilant against fraud.
Older adults face more financial challenges and decisions than younger generations. Examples include Social Security claiming age, required minimum distributions (RMDs), Medicare enrollment, taxes on multiple income streams, long-term care planning, and housing decisions.
Age 60+ is also a time when people review their past achievements and think about what they still want to do. In other words, their “bucket list.” Many older adults are also interested in simplifying their finances, downsizing possessions, philanthropy, and giving back to others.
Common concerns of older adults are running out of money during their lifetime, health care costs, loss of independence, cognitive decline, and the cost of long-term care services, if needed.
This article describes action steps to address the financial challenges and concerns listed above.
25 Financial Planning Strategies
1. Don’t Forget the Basics
Continue financial management tasks that, ideally, you have been practicing for decades. This includes calculating net worth (assets minus debts) to get a snapshot view of your finances and cash flow (income minus expenses). Also, preparing a spending plan (budget), setting specific financial goals, and creating an adequate emergency fund.
2. Assess Current and Future Insurance Needs
Review your insurance coverage with a licensed insurance professional on a regular basis and revise it as needed. This includes life insurance, health insurance (Original Medicare and a Medigap supplemental plan or Medicare Advantage), long-term care insurance or alternative plans (e.g., self-funding), and property insurance (auto, homeowners/renters, umbrella).
3. Follow Recommended Investment Strategies
Diversify your portfolio across different asset classes (e.g., stocks, bonds, and cash assets like money market funds), and never invest in anything you can’t explain simply to someone. Buy investments with low expense ratios (expenses as a percentage of assets) for financial goals that are five or more years in the future.
4. Create a Retirement “Paycheck”
Try to simulate a regular income stream, like a paycheck, with annual cash withdrawals divided by 12 or 26, automated mutual fund withdrawals, and CD or bond “ladders” that provide regular income payments. Other sources of regular income are annuities, Social Security, pensions, and employment earnings.
5. Take Required Minimum Distributions (RMDs)
Begin RMDs from tax-deferred retirement accounts like traditional IRAs and 401(k)s at age 73 (if born between 1951 and 1959) or 75 (if born in 1960 or later). Withdrawals are taxed as ordinary income and calculated by dividing the account balance on December 31 of the previous year by an age-based divisor.
6. Practice Tax Minimization
Reduce income tax owed to the lowest legal amount possible under tax law with tax-deferred investments, catch-up contributions for workers age 50+, Roth IRA conversions in low-income years, long-term capital gains tax rates on investments, and “bunching” itemized tax deductions to exceed the standard deduction amount.
7. Make Plans for Untitled Property
Decide who will get your “stuff” when you pass. Consider the interests of potential heirs, make a written list of who gets what, and share the list with family members and your estate’s personal representative. Also consider lifetime gifting to see others enjoy their bequests.
8. Get Help When Needed
Consider hiring professional advisors when later life becomes complex or to answer unique personal questions. This includes a certified financial planner® (CFP®) for a comprehensive review of your finances and an attorney for estate planning. Volunteers for SHIP and VITA can help with health care decisions and taxes, respectively.
9. Leave a Legacy
Identify ways to leave something behind. Legacies can include children and grandchildren, creative works (art, music, books), and gifts to heirs and/or charities. Tax-saving charitable gifting methods include donor advised funds, certain trusts, and qualified charitable distributions (QCDs) from a traditional IRA.
10. Communicate, Communicate, Communicate
Keep trusted loved ones in the loop. Prepare a financial inventory, a letter of last instructions with preferences for burial/cremation and a memorial service, a digital assets inventory, and a “What to Do/Who to Contact” list. Share this information with trusted individuals.
11. Keep Organized Financial Records
Create a one-stop financial center for records such as bank, brokerage, and credit card statements, insurance policies, recent tax returns, financial statements like net worth and cash flow (see #1), a digital assets list, a list of beneficiaries and personal representatives, and other important papers.
12. Learn the Fine Print About Medicare
Stay abreast of annual changes to Medicare with the annual Medicare and You publication and budget for monthly Medicare Part B and Part D premiums as well as Medicare supplement policy premiums and copays. More affluent retirees should try to avoid or reduce the Medicare premium surcharge known as IRMAA.
13. Make Prudent Asset Withdrawals
Make a plan to withdraw retirement savings without running out of money. For example, the 4% Rule where 4% of an account (50% invested in stock) is withdrawn during retirement year one and inflation-adjusted thereafter. Some people use Monte Carlo calculators or hire a CFP® to make withdrawal calculations.
14. Estimate Tax Withholding Accurately
Check the online IRS Tax Withholding Estimator to see if tax withholding and/or estimated tax payments are sufficient to cover your tax liability and avoid underwithholding penalties. This is especially important for older adults who have multiple income sources including pensions, Social Security, and RMD withdrawals.
15. Increase Your Personal Finance Knowledge
Aim to learn one new thing about personal finance every day. Information sources include television and radio, books, blogs, social media, newspapers and magazines, webinars, podcasts, community classes, and conversations with financially knowledgeable people.
16. “Ladder” Fixed Income Securities
Stagger maturity dates on a series of bonds or certificates of deposit (CDs). Doing so “hedges your bets” as interest rates change, provides liquidity at frequent time intervals (versus buying only one bond or CD), and staggers interest payments to create a retirement “paycheck.”
17. Play the “Age Card”
Take advantage of money-saving discounts for older adults at movies, plays, theme parks, national parks, restaurants, and more. Taxpayers age 65+ also receive one, and possibly two (if income qualified), extra standard deductions on income taxes and property tax discounts in some locations.
18. Avoid Elder Fraud Scams
Keep your “BS meter” on. Seniors are prime targets for fraud because they have more wealth than young adults. Three common scams are tech support, imposter, and romance scams. Beware of requests to act immediately, wire money, and make payments with gift cards and at Bitcoin ATMs.
19. Build Resiliency Resources
Build strong relationships with others who can provide help and/or financial support, if needed. Relationships are a key factor in retirement happiness. Other resiliency resources are an adequate emergency fund and insurance coverage, a low debt-to-income ratio, and a positive outlook on life.
20. Get Comfortable “Spending Down”
Step outside your “spending comfort zone” if you find it difficult to touch your retirement savings. For some people, withdrawing money from savings feels like a loss. Purchase orchestra seats at a play, for example, and automate savings withdrawals. Answer the question “If you don’t spend your money, who will?”
21. Mitigate Sequence of Returns Risk
Be aware of the danger that poor investment returns early in retirement, combined with account withdrawals for living expenses, will reduce a portfolio’s value and increase the risk of running out of money sooner. Experts advise holding “buffer assets” (e.g., a money market fund) to pay expenses during market downturns.
22. Decide When to Collect Social Security
Pick a starting age between 62 and 70. Benefits are permanently reduced before full retirement age (67 if born in 1960 or later) and increased between FRA and age 70. Also, before FRA, the earnings limit applies to annual earnings over $23,400 and $62,160 if you reach FRA (in 2025).
23. Set “Through Retirement” Goals
Develop goals to get through retirement once you get to retirement. In other words, a later life “bucket list.” This step includes making plans for RMD withdrawals (see #5) that can be spent, gifted, and/or re-saved in taxable accounts and setting SMART goals with a price and deadline.
24. Simplify Your Finances
Consolidate “like” assets such as multiple IRAs or mutual funds and close subpar accounts with high expense ratios and below-average returns. Purge and shred unnecessary documents and cull automated payments for rarely used services (e.g., gym and satellite radio).
25. Achieve Financial Peace of Mind
Run periodic status checks of your finances with online calculators and regularly review net worth and income and expenses. Also, develop a long-term care (LTC) plan that could include LTC insurance, self-funding, or a move into a continuing care retirement community.
Final Thoughts
Common later life financial errors include improper asset withdrawals, delayed estate planning, lack of long-term care planning, and hasty Social Security decisions. The action steps described above can help provide a roadmap for financial success.
