Too many people mistakenly think that they’re no longer able to invest once they’ve retired. However, while they may not want to continue contributing to a retirement account in a traditional way, wealth planning and management are still essential parts of finding financial success in retirement.
If you’re interested in learning more about retirement wealth management, we’re here to help. Being financially prepared will ensure a more comfortable lifestyle during your next chapter. Let’s look at what you should know about the benefits of wealth management during retirement and how you can make it work for you.
Essential Concepts in Retirement Wealth Management
Before you dive into your retirement wealth management options, it’s essential to understand a few basic concepts. Equipping yourself with this knowledge will help you make informed decisions about investing your money and maximizing your income.
The two concepts that are necessary to understand wealth management are asset allocation and total return investing. By understanding these ideas, you’ll be better prepared to manage your money in retirement and choose how to fund it.
#1: Asset Allocation
The first thing to understand about retirement wealth management options is to know where to invest your money. Many retired investors struggle with deciding where to invest their money, because they know they’ll need to use at least a portion of their accumulated wealth soon. To help make healthy investment decisions, many use something called asset allocation.
This is one of the critical concepts to investing, not only during retirement, but in general. Asset allocation is the strategy you use to diversify your investments among different assets, such as real estate, cash, stocks, and bonds.
The way you choose to allocate your assets will help you balance risk tolerance with your goals and retirement timeline. For example, riskier assets, such as stocks, can lead your income to fluctuate more. However, they may end up generating more significant returns in the long run. It’s important to understand how you personally want to balance risk and returns in your portfolio during retirement, and what goals you want to achieve with your wealth in both the short and long term.
Another component of asset allocation is ensuring that you purchase enough securities within each asset class to maintain a diversified portfolio. Becoming over concentrated in one type of investment (such as stocks, bonds, etc.) can lead to poor portfolio performance, and set you up to take on more risk than is necessary in the long run.
#2: Total Return Investing
Asset allocation isn’t the only concept you need to know about to make smart retirement investing decisions. Another critical concept is something called “total return investing”.
When people prepare to invest for retirement, they often worry that they’ll have to use some of their principal investment as retirement income. They don’t realize that it’s challenging to receive a majority of income from dividends and interest alone.
To leverage total return investing, the investor must focus on earning the most after-tax income possible. This principle balances the amount of portfolio risk with the total returns earned by the portfolio. To achieve this goal, investors shouldn’t concern themselves with the source of the income in retirement.
Options for Managing Your Retirement Wealth
There are several options for successfully managing your retirement wealth. Implementing any one of these strategies or using a combination of them can help you not only manage your money, but ultimately grow your nest egg – both now and throughout retirement.
Keep in mind, working with a financial professional can help you make informed choices about your wealth management during retirement. Taking the time to consult with someone about your potential options lets you know which strategies to implement, and which to avoid. Financial advisors are in tune with both your unique goals and how to create a lasting financial strategy to help you achieve them.
#3: Downsize Your Home
By the time most people retire, they usually don’t need all the space they have in their current home. In fact, housing is one of the most significant expenditures for most seniors in retirement.
The Center for Retirement Research even states that by downsizing a house by $100,000, you can cut back $3,250 annually. These cost reductions are because houses cost a great deal of money in upkeep and taxes.
When you downsize from a large home, you can reduce these expenses and put more cash back into your pocket. Think of what $3,250 a year could do for you in retirement – it might mean more money to travel, spend time with your grandkids, or pursue hobbies you enjoy.
This is, of course, only the financial case for downsizing your home. The truth is, your home can take up a lot of your time and energy. Yard work, cleaning, maintenance, and home renovation all take up a significant amount of time and limited energy. Ask yourself if you want to spend your time working on your home in retirement, or if you’d rather have a smaller space that was less taxing to care for.
During your retirement years, you can start saving more money and freeing up your time by reducing the size of your home. For instance, cutting back on your home’s size means cutting back on utility costs and cleaning supplies, which provides you with even more money to invest in retirement.
#4: Reduce Your Equity
Another crucial strategy for retirement wealth management is to reduce your equity. Many people have large amounts of equity spread out across several different investments. And, while diversification is imperative, you also need to have a portfolio that fits your lifestyle.
Part of creating a portfolio that makes sense for you involves developing an investing strategy. Because your retirement income pulls mainly from the money you earn in the years just before retirement, having large amounts of equities in your financial portfolio no longer makes sense.
Instead, reducing your total equity can help you create a more conservative investment strategy. As you near retirement, consider making equities less than half of your total portfolio to manage risk better.
#5: Make Strategic Withdrawals
Strategic withdrawals involve making withdrawals that are well-thought-out, and that fit your unique retirement lifestyle and goals, while minimizing tax liability.
Typically, experts tell retirees to withdraw somewhere between 3% and 4% of their savings during the first year of their retirement. They’ll need to adjust their withdrawals from there depending on the cost of inflation. Withdrawing around the 3% mark gives you a better chance of having a well-balanced stock and bond portfolio that lasts a long time.
Remember, when it comes to a withdrawal strategy, the amount you withdraw and what account you withdraw it from will vary depending on your situation. Speaking to a wealth manager or financial advisor will help you make strategic withdrawals that protect your capital even during lousy market years.
#6: Know Where to Invest Your Assets
Most retirees are unaware of where they should be investing their assets. Once they max out their 401k or IRA accounts, they feel as though they’re at a loss for where to put their money next.
To make tax-efficient investments, you could opt for taxable retirement accounts as your next choice for saving for retirement or other long-term goals. Alternatively, you could find buy-and-hold, or index equity funds that don’t generate as many capital gains distributions.
Please note that if you hit a point in your investing journey where you have maxed out available retirement savings accounts and are looking for next steps, speaking with a financial advisor is in your best interest. DIY-ing your investments once you reach a certain level of savings or wealth can potentially do more harm than good, and an advisor will be able to help guide you to find the right next steps for your unique goals.
#7: Analyze Your Retirement Expenses
Part of smart money management during retirement involves analyzing your retirement expenses. It can be tricky to get an accurate idea of your actual retirement expenses, especially if you haven’t retired yet!
One critical factor to keep in mind as you look to analyze your retirement spending is that your total expenditures typically decrease during retirement. Having fewer expenses can help you make accurate distinctions between non-discretionary and discretionary spending to track your budget accurately.
If you haven’t retired yet, you might also consider taking 6 months and living as though you have retired. Take a “bucket list” vacation, leverage work from home flexibility to see what changes in utilities or grocery bills you may have, and pursue hobbies you imagine yourself taking part in when you retire. Then, track these expenses to see what you’re actually spending, and whether it’s in line with what you had estimated.
#8: Continue Working
Some people choose to continue working during their retirement years. While people are eligible for their retirement benefits at the age of 62, working for longer can help you continue to save and increase cash flow. This will help you manage your wealth better when you are ready to retire, and increase the size of your nest egg before taking the leap.
On top of that, when you work for longer, you receive more Social Security income. Your SSI payouts are based on your highest earned annual income. If you receive a job promotion during a later year of your career, you could obtain even more social security revenue during that time.
#9: Maximize on Tax Savings
One key option for retirement wealth management involves maximizing your tax savings. Taxes can take up a large chunk of your retirement income, especially since your mortgage is typically paid off by the time you retire, and you don’t have dependents living with you anymore.
However, you can still save big on taxes with the right know-how. Understanding how your income tax bracket will affect your capital gains rates and other investment returns can help you better understand how to reduce your taxes.
Wealth management professionals can offer you additional methods for saving on taxes during your retirement years, too. Speaking with a financial expert can help you reduce taxes as much as possible after you retire.
Build a Strong Retirement Wealth Management Strategy
By following these tips, you will prepare yourself for effective retirement wealth management.
Remember that part of creating a solid retirement wealth management strategy is consulting with an expert. Financial services professionals will help you make informed investment decisions so that you can generate a profit.
If you need a wealth management team, Mariaca Wealth Management, LLC can help. Our financial experts will help you manage your retirement income in the best way possible. Call now to speak with a financial planning professional, and let’s start maximizing the profits on your retirement investments.