Learning how to become smarter with your money is important to long-term financial success. A recent Motley Fool article, “3 Essential Money Lessons for Retirees,” gives us some key money lessons all retirees need to know. Mastering your finances is a life-long journey. Merely retiring doesn’t mean you have it all figured out or you’re at the conclusion of this task. Retirees can often be in for a rude awakening if they’ve ignored their financial situation throughout their working lives.
Retirees should have several money lessons down cold by the time they retire. One of the most crucial is how to live within a budget. Learning that lesson is doubly important for retirees because they’re usually living on a fixed income and aren’t likely to have the option of reentering the work force to make up for any shortfalls. Without a proper budget, they could risk tapping into their nest egg earlier and much more quickly than originally intended. This could make for big problems down the road when those funds are depleted.
At its essence, the lesson is simple: spend less money than you make.
Next, it’s important to use your retirement savings correctly. Since your retirement savings accounts—like your IRAs or 401(k)s — are tax-advantageous, let the magic of tax-free compounding work as long as possible. So, if you have money in taxable brokerage accounts, it should be used first. These accounts require you to pay taxes on your dividends each year, as well as on capital gains when you sell investments, so use these sooner and allow your tax-advantaged investments to keep growing. If you have money in a Roth account, it should be used last. Not only do these accounts not have any RMD (required minimum distribution) requirements, but they’re also the best thing for leaving tax-free income to your heirs. They’re an excellent estate planning tool.
Finally, where you retire can be just as important as when you retire.
There are 13 states that tax your Social Security benefits! But take a breath…in nine of these states they only tax Social Security income if a retiree makes more than a certain exemption level or threshold. Be advised – Minnesota, North Dakota, Vermont and West Virginia tax every dollar of Social Security benefits you earn. That may be something to consider if you are planning on relocating.
Property taxes can be a major factor. Compare these numbers: if you live in Hawaii, you’ll pay a mean effective property tax of 0.28%. On the other hand, New Jersey’s property tax is 2.38%. Of course, these figures depend on home values, but many retirees are unaware of the costs they’ll incur in retirement that are based just on where they live.
Before you retire, understand how your state taxes retirement benefits, including Social Security. Also, learn the type of property and sales taxes you might encounter. Moving to a more tax-friendly state could extend the life of your nest egg by years.
Don’t go into retirement without getting to know these potential costs.
Reference: Motley Fool (December 30, 2015) “3 Essential Money Lessons for Retirees”
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