Budgeting in Retirement: Years 5 to 10

Daydreaming about what your retirement would look like and actually living it is another thing. It’s only after you’ve left the workforce that the day-to-day reality hits you. And just like how life in your 20s can be different than life in your 30s, you can expect some changes at different stages throughout your golden years. In turn, you’ll need to make tweaks to your budget accordingly.

In our first post of the series, we went over how to create a spending plan in the first five years of retirement. In the next installment, we’ll look at what to consider financially in years 5 to 10 of retirement.

Review Your Life Insurance

Take a look at life insurance policies you might still be holding, and ask yourself if you still really have a need for the coverage, recommends Jeff Burke, owner of 7th Street Financial. “Usually, life insurance is used to replace the lost income of someone passing away early,” Burke said. “Once you’re in retirement, there’s no income to replace other than Social Security or a pension.” Depending on the type of coverage, it might be costly. If the need for the benefit might be minimal, consider canceling your life insurance policy.

Consider the Required Minimum Distribution

You’ll need to start withdrawing retirement funds kept in tax-deferred accounts such as IRA and 401(k) plans by age 70 and a half. And if you’re retiring around 65, you’ll need to factor in required minimum distributions (RMD) in your spending plan.

There are a few major differences between how IRA and 401(k) funds are treated, Burke explained. For one, while money must be taken out of a 401(k) plan, one caveat is that if you’re still employed with a company, withdrawals aren’t required from that employer. Money from an IRA, on the other hand, must be withdrawn if you’re still employed.

If you have multiple IRA accounts, they’re basically treated as a single account when it comes to taking money out — as long as you’re still meeting the total required amount. (You can figure out the minimum you must withdraw from your plans with this IRS table.) Remember: withdrawals are considered taxable income, so budget accordingly.

Prepare for Medical Expenses

While anyone can apply for Medicare when they reach 65, it doesn’t cover all medical expenses. “Prescription drugs, dental, vision, hearing aids, overseas medical costs and long-term care are some key items not covered at all by Medicare,” Burke said.
“In addition, there’s a monthly premium for Medicare Part B (135.50 per month for 2019) along with deductibles and co-payments for services.” Burke recommends looking at a supplemental or a comprehensive plan, which can provide coverage for these additional items. If you’re not happy with the plan you currently have, you can elect to change your coverage during open enrollment each year.

Home Maintenance

If you still own a home, you might no longer want to perform the tasks to upkeep the property, like mowing the lawn, raking leaves and shoveling snow. You might want to spend your time with family or engrossed in your passion projects. “It might be time to hire a service to perform these tasks for you,” Burke said. If that’s the case, you’ll need to budget for a gardener, handyperson and home maintenance services.

Tax Benefits for Retirees

Tax planning is a big part of your spending plan during retirement. Take advantage of the tax breaks available to you on the local and state level, Burke said. On the local level, you might be able to get a break on property taxes. Plus, many states waive part or all of Social Security income. Plus, some states might waive a portion of retirement income from pensions and employment retirement plans from taxable income.

“Some of these benefits can be so powerful that relocation becomes an attractive option for many seniors,” Burke said. “These tax breaks can be worth over $10,000 per year.” On the flip side, some of these states might tax you more heavily in other areas, so you’ll want to look at the complete picture to determine which states provide the most tax savings.

Consider Semi-Retirement

Semi-retirement could mean a lot of things, explained Robinson Crawford, founder of Montebello Avenue. Perhaps one partner in the marriage retires first and the other continues to work. Or maybe the breadwinner transitions from full-time to part-time employment. Semi-retirement also gives you more flexibility, Crawford said.

For instance, you can budget for traveling, spend time with your friends, kids and grandkids, and take up hobbies.

“The point is that, instead of a dramatic transition that happens all at once, retirement can be a longer one,” Crawford said.

When it comes to creating a budget, it’s helpful to divvy up your retirement years into stages with different needs and changes. That way, you can get more nitty-gritty and plan for specific expenses at each phase.

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