How Financial Literacy Changes in Retirement

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Financial literacy covers a wide range of topics, from budgeting and saving to investing and planning for retirement. Once retired, however, financial literacy expands to include scenarios that may not have been so relevant during your working life. For example, income generally decreases in retirement, while expenses may stay the same or even increase, depending on the type of lifestyle you lead and the state of your overall health.

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Financial Literacy Month is a great time for seniors and those about to retire to review their planning and make sure they are prepared for the changes in retirement. Here are seven topics that are important to understand if you want to avoid financial landmines in retirement.

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Bill Oxford/Getty Images/iStockphoto

Social Security

From the moment you start receiving your first paychecks, you are contributing to the social security system. But as you approach retirement, it’s time to start planning your Social Security withdrawal strategy. Before you retire, it pays to maximize your income in every way possible because your Social Security payout is based largely on what you earn during your working career. You’ll also want to sit down with a tax or financial advisor and consider whether you should start your payments early, at full retirement age, or until age 70.

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designer491/Getty Images/iStockphoto

Health Insurance

Medicare is a health insurance program for seniors, but it’s a complicated system with many parts. To use it effectively, you will need to familiarize yourself with how it works. In a nutshell, Medicare consists of two original parts, A and B, which cover hospital and medical expenses respectively. Part B requires a monthly premium. You can also add Part D if you need prescription drug coverage. Medicare Advantage, also known as Medicare Part C, is an alternative to Original Medicare that is operated by a private company. As the choices can get complicated, you’ll probably need to talk to an expert to gain financial knowledge about health insurance. Note that neither Original Medicare nor Medicare Advantage are likely to cover care outside of the United States.

Andrii Dodonov / iStock.com

Andrii Dodonov / iStock.com

Minimum required distributions

Just as you have paid social security contributions throughout your professional career, I hope you have done the same in terms of contributions to your pension plans. But you can’t keep your money in these accounts forever. At some point, accounts like traditional IRAs and 401(k) plans require you to start receiving annual distributions to avoid a 50% tax penalty. Congress recently granted a slight reprieve by extending the date you must begin RMDs until April 1 following the year you turn 72. .

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Ligorko/Getty Images/iStockphoto

Taxes

If you work in a salaried job, your life can be quite simple when it comes to taxes. Typically, your employer will deduct the required taxes from your paycheck, and all you have to do when filing your taxes is include your W-2 information. However, as you reach retirement, you might find yourself with a myriad of tax forms, ranging from 1099-R and K-1 to 1099-INT or SSA-1099. Some of them may have different tax implications for you, so you’ll need to get up to speed on filing your taxes properly after you retire.

shape charge / Getty Images

shape charge / Getty Images

Expenses

Even if you’re familiar with budgeting for your working days, once you retire your budget is likely to change, sometimes significantly. For example, many retirees have paid off their mortgages and no longer have this major housing expense. However, some expenses, such as medical bills, are likely to increase even if you have good insurance. Other expenses may vary depending on the lifestyle you plan to live. For example, some retirees see a significant increase in travel and dining expenses, while others manage to reduce these costs instead. The thing is, budgets can vary widely from person to person, but they usually change once someone reaches retirement. Be proactive and understand that your expenses can go up or down significantly in retirement.

Westend61/Getty Images

Westend61/Getty Images

End of life planning

Nobody likes to talk about the end of their life, but it’s an essential step when it comes to financial planning. To start, you need to write a will and/or a trust to specify who should receive your assets when you pass. You may also want to sit down with an estate lawyer to discuss strategies for maximizing the value of your asset transfers to heirs. From a non-financial perspective, you should also write out instructions for end-of-life planning ahead of time, in case you become incapacitated. For example, you may want to sign an advance directive such as an Enduring Power of Attorney for Health Care, which gives someone else the ability to make medical decisions on your behalf.

SARINYAPINNGAM/Getty Images/iStockphoto

SARINYAPINNGAM/Getty Images/iStockphoto

Asset allocation

Chances are you encountered the concept of asset allocation in your pre-retirement years, whether in a 401(k) plan or in your own investment account. But when you retire, you’ll likely need to adjust the asset allocation that has hopefully served you well during your working years. In retirement, not only will you have fewer years to recover from a decline in your investments, but you won’t have as much income to add to your account when the markets go down. Thus, many financial advisors will recommend that you shift your portfolio towards more conservative investments as you get older. However, each person’s financial situation is unique. You should therefore analyze your income, expenses and financial needs, perhaps with the help of a financial advisor, before making any drastic changes to your portfolio.

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This article originally appeared on GOBankingRates.com: How Financial Literacy Changes After You Retire