Retirement 101: Starting the Year on the Right Foot with 3 Steps to Take Now

KCS Wealth (Byline: Katrina Soelter)

March 7, 2020

The beginning of the year tends to be full of new goals, resolutions, and refreshed sense of “getting things done.” Unfortunately, we often pick goals that require active habit changes, which plenty of research has shown can be hard to accomplish.

As humans, our brains can only take so much change at one time. Our willpower is a depleting resource. This means that new habits are best taken on one at a time if they require us to engage actively to create the new habit.

Fortunately, as a retiree, there are 3 easy steps you can take to start 2020 off with positive financial habits – and all three steps do not require ongoing active willpower! This should be very good news if you like to take on multiple big projects at the beginning of the year, but often struggle to accomplish them all.

Step 1: Organize Financial Documents

This step makes the whole rest of the year easier – trust us. At the beginning of the year, you will start to receive all sorts of tax documents, receipts from charitable donations, property tax bills, and other statements that are helpful when you do your taxes. By setting up some filing cabinet somewhere, you will make February and March so much easier on yourself – and on your CPA.

Spend about 1 hour in your home office with your filing cabinet (we know you have one, time to dust it off) and set up folders with labels for each of the categories you need:

  • Tax documents
  • Charitable donations
  • Property taxes
  • Healthcare expenses
  • Mortgage statements
  • Investment account statements
  • Miscellaneous Financial Stuff

Now when you get your mail, simply stick the envelope into the appropriate file. If that’s too hard, pile it up and go through it once a week. You don’t even have to open the envelope right now. Just get it in the file.

Wasn’t that easy? Now go reward yourself!

Step 2: Plan Monthly Withdrawals to Align with Your Spending

One of the most common questions we hear from clients that are planning to retire is: how do I get money now that I’m not working?

The easy answer is – from your investment and savings accounts!

The longer, more complicated answer is that you must plan for your income now. When you did your retirement planning, you sketched out how much you were going to spend each year. Hopefully, you had categories for your expenses, and separated out vacation, property taxes, and other one-time/infrequent expenses. It’s time to set up your withdrawals from your accounts to match your planned expenses. This is easiest to explain with an example.

Let’s take our client Sarah*. Sarah had planned to spend $87,500 per year for all her regular expenses (everything from her utilities and cable to her groceries, gas, dining out, gifts for grandchildren, etc.). In addition, she wants to spend $10,000 on vacations and travel every year, plus her property tax bills are $10,000 a year. She also has medical bills this year for $7,000 (her estimate).

Her typical expenses (that $87,500 number) should be transferred automatically to her bank account every month. However, it’s a little more complicated than calling us up and saying, “Let’s move $7,292 every month into my account”. This is because Sarah also gets a pension from her first job ($10,000 a year) plus she started collecting Social Security in November ($1,489 per month).

So, we map this out and see exactly how much is left to make up her $7,292 need every month:

$7,292 : how much Sarah needs to live every month

– $625 : how much Sarah gets from her pension ($10,000 – $2,500 withheld from taxes = $75,000 / 12 = $625 per month)

– $1,489 : how much Sarah gets from Social Security

$5,178 : this is what she needs from her investment accounts every month

NOW we can set up her monthly transfer. Too often, we forget about the other forms of income that are coming in, and suddenly we are way overspending our projected retirement needs. This method protects against overspending by capping the amount that is transferred to Sarah’s account.

For Sarah’s one-time expenses, we have a few choices. She can call us up each time she has one of those needs – for vacation, property taxes, or medical expenses – or she can have us transfer a lump sum that will sit in her bank account, so that she has what she needs starting at the beginning of the year. There’s an investment case to be made for calling up when she has the extra needs (the money stays in her account so it can accrue interest until she needs it), but there’s an emotional case that can be made for moving it into her savings account at the beginning of the year. It is a personal decision and best discussed with your advisor.

And that’s it! It should only take 1 hour of math (or a call with your advisor) to figure out what your monthly transfer should be and get it set up.

Time for another reward!

*Not her real name

Step 3: Set Up Tracking for Your Expenses

Last but not least, it is time to set up one last system to make the rest of the year easy! This one is going to take a little more time, but it’s well worth it.

Moving through retirement, the biggest variable is your spending from year to year. Understanding what you are spending will make your life easier for years to come and will make your planning and projections that much more accurate.

We at KCS use eMoney software with our clients, which has a “spending” tool that allows our clients to link up their bank accounts. It automatically sorts the expenses into categories so everyone can quickly see what is being spent where.

If you’re not a client of ours, that’s ok – you can give us a call! Or, there are several services out there that clients of ours have used with success, including:

  • Tiller Money
  • Mint
  • You Need A Budget
  • Excel Spreadsheets
  • Quickbooks
  • A handwritten journal (by far the most work intensive option)

We see success with a version that requires some action on your part but mostly automates the categories, so you can see what is going on easily. Choose the one you like best (or if you don’t want to do the choosing, just pick one from the list to start with), sign up, and link up your bank accounts.

This should take 1 hour.

Then, set a time on your calendar to look at your expenses every month. Make sure it’s a time you can actually make and will not resent doing it (like the third Monday of the month) and connect it with an activity you enjoy (like reading, napping, cooking, seeing friends, drinking wine) so that your expense overview time is rewarded when it is done.

That’s it! Combining these three steps will help you feel much more organized and at peace moving into the new year. Plus, none of them require daily or even weekly action to maintain. New habits – check!