Whatever the size of your nest egg, retirement will likely mean big changes in your financial life. Sources of income can shift, as can expenses, and financial priorities often change as you move from saving for retirement to generating income.
Here are four ways to help make managing your finances easier in retirement.
1. Manage your retirement income
To start, consider the ways that retirement can change cash flow. Your paycheck may be replaced by income from a variety of sources, including Social Security benefits, pension distributions, and annuity payments. If you are age 72 or older (or age 73 if you attained age 72 on or after January 1,2023)*, you will be required to take minimum distributions from your retirement plans, including 401(k)s, 403(b)s and IRAs (with the exception of Roth 401(k), Roth 403(b), and Roth IRA accounts). Some retirees may even generate income from part-time employment or sales of assets.
All of this means that money is arriving in varying amounts on very different schedules—most likely in the form of a check. To manage these income sources, you can set up direct deposit services, or use a financial institution that offers remote deposit—meaning you can scan or snap a photo of a check with a smartphone.
Spending patterns will also likely change, reflecting both your new lifestyle and shifting financial responsibilities. When you retire, often nothing is being withheld for state and federal income taxes, so you may be responsible for any quarterly estimated taxes. Likewise, most retirees generally have to pay health care and other insurance premiums directly to the insurance carrier(s). Some retirees may also find they are traveling more or living in dual residences. All these situations can make monthly bill paying even more complicated.
Thankfully, technology makes it easy to manage your regular financial transactions from anywhere. So consider exploring financial management tools that are available for your phone, tablet, or computer. Doing so can eliminate worries about paying the mortgage bill, no matter where you happen to be.
2. Consider using the bucket approach
At any point in your retirement, your income streams may be producing more cash than you are spending. If so, you’ll want to think about how to continue to invest that excess cash flow to help meet both your short- and longer-term needs for both income and growth. When investing, make liquidity—how quickly you need access to your cash—a central consideration. In general, the more comfortable you are with risk (for reasons of investment horizon and risk tolerance) the greater the level of risk—and potential return—you can afford to pursue.
One approach to consider is to bucket cash for different needs, such as living expenses, short-term goals, and emergencies.
3. Tie it all together
The key is to make sure your money can be easily accessed, moved, and invested according to your needs. Some people opt to consolidate by putting all their funds into a group of accounts with a single provider, so that money can move easily from one account to another. Making periodic withdrawals is an approach that can help you create a “just-in-time” income stream and allow remaining assets to produce potential earnings until you need more cash.
Whatever approach you take, it’s important to choose financial institutions that provide the features you need to make your retirement finances easy to manage, affordable, and flexible.
4. Have a clear picture of your finances
The cash management system you create in retirement should offer a comprehensive view of your finances. Having the ability to access concise, up-to-date reports on your cash balances, transactions, and assets can help you prevent any cash flow surprises.
Putting a good cash management system in place now can pay off in the future. For example, it can make it easier for you to handle your finances as you grow older. Record the specifics, such as direct deposits and automatic transfer schedules, so if you are unable to access your account(s), a properly authorized spouse/partner or third party can make changes as necessary.
Taking the time to think through the "what ifs" of future cash management also means that you get to make the decisions about how you'll be using your financial resources during a retirement that may stretch 30 years or more.