Understanding Your Financial Needs in Retirement
Before deciding whether or not to invest, it’s important to understand your current financial situation. Take a good look at your monthly income along with all retirement savings. Your monthly income includes all unearned income — such as social security, pensions, or other payments not acquired through work.
Calculate Unearned Income & Savings
Social Security
Social Security payments vary from person to person. Your Social Security benefits are calculated using the earnings from your highest 35 years of income. Payments are also affected by how soon you choose to start collecting — anywhere from age 62 to 70.
Write down your monthly Social Security payment and multiply it by 12 to calculate your annual Social Security income.
Pensions
Do you have a pension plan with a previous employer? While some employers allow you to cash out your pension in one lump sum, the majority of pensions are paid out monthly. Write down your monthly payment and calculate your annual payout.
If you’ve chosen to cash out your pension in one lump sum, include that money in the ‘savings’ section below.
Other Unearned Income
Include any other monthly payments with Social Security and pensions (if applicable). Additional unearned income may come from disability or veteran benefits, workers’ compensation, railroad retirement annuities, or unemployment insurance benefits.
Savings
Next, calculate the sum of all your savings. Depending on how you manage your money, this may involve checking accounts, savings accounts, money market accounts, certificates of deposit, and more.
This will paint an accurate picture of your total savings, which represents your financial “cushion.” Your cushion could come into play if you have a financial deficit each month, or for major expenses such as home or car purchases, vacations, unexpected repairs, emergency situations, and more.
Calculate Income Vs. Expenses
Once you’ve pinpointed the amount of money you have coming in each month (unearned income), along with your financial cushion (savings), you’re ready to compare your income to your living expenses. This will help you determine whether you have a surplus of money each month or a deficit.
Start writing down your living expenses, which may include things like mortgage or rent payments, car payments and transportation costs, insurance, food costs, utilities, healthcare costs (such as medications and appointments), entertainment expenses (like internet, television, or streaming services), credit card payments, and more.
Once you’ve gained an accurate picture of how much money you spend each month, you’re ready to compare your unearned income with your expenses. If you earn more each month than you spend, you’re in a surplus, and your wealth should theoretically grow over time. If you spend more each month than you earn, you’re in a deficit, and your wealth will gradually shrink as you dip into your savings.
Safe Investment Options for Retirees
Whether you’re concerned about an income deficit, or you’re just trying to grow your financial cushion, there are plenty of safe — yet beneficial — investment opportunities for retirees.
Fixed-Income Investments
To see a return on investment without much financial risk, consider fixed-income investments, which provide a predetermined return through interest payments. These include bonds, Certificates of Deposit (CDs), and Treasury securities.
Bonds
Bonds function a lot like loans, where you (the bondholder) lend money to governments or corporations (bond issuers) wanting to raise money.* In exchange, the bond issuer will pay back the investor after a predetermined period of time, known as reaching “maturity,” with added interest.
Bonds can be a stable investment, especially ones that are issued from reputable sources. However, you must be wary of high-yield bonds, which pay out higher interest rates but come with a much greater risk of default. Should the bond issuer default, you’re unlikely to recover your investment.
Certificates of Deposit (CDs)
Certificates of Deposit, or CDs, work somewhat like bonds, except you’re lending (or depositing) money into a bank. The bank gets to hold your money for a predetermined period of time, ranging from a few months to several years. The bank will compensate you for this influx of capital by paying out interest, often on a monthly basis. CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, making for a low-risk investment.
It’s important to note that, if you wish to withdraw your CD before it reaches maturity, you will be penalized. So be sure you can afford to fulfill the terms of the CD before agreeing to it.
Treasury Securities
If you’re looking for the ultimate safe investment, Treasury securities may be for you.* Treasury securities can be in the form of Treasury bills (T-bills), Treasury notes (T-notes) or Treasury bonds (T-bonds). These are all backed by the U.S. government and serve as a way of financing government spending.
T-bills have the shortest maturity, available in your choice of four weeks, eight weeks, 13 weeks, 26 weeks, or 52 weeks. T-notes have a medium maturity of two, three, five, seven or 10 years. Then, there’s T-bonds, commonly known as “long bonds.” These mature in 30 years, making them less desirable for older people.
Fixed income investments like bonds, CDs, and Treasury securities can be a valuable tool for generating additional income during retirement. They can provide you with regular payments to supplement your Social Security and other unearned income.
Annuities
Annuities are a popular choice for retirees worried about outliving their savings.* Annuities provide a regular, guaranteed stream of income over a specified period of time — or for the rest of your life, depending on the terms. But this arrangement doesn’t come without a price.
The person buying into the annuity, known as the annuitant, must agree to hand over part of — or sometimes all of — their savings to an insurance company in what’s known as a premium. Paying this premium purchases the annuity and secures a future income stream but sacrifices a large sum of money. The insurance company will invest the premium, earning interest on the account.
There are many types of annuities, including:
Immediate Annuity - Payments begin immediately after the buy-in.
Deferred Annuity - Payments start at a set future date.
Fixed Annuity - Payments are based on a guaranteed, predetermined amount.
Indexed Annuity - Payments have a guaranteed return but with the option of sharing investment earnings.
Variable Annuity - Payments will vary and are not guaranteed, although many contracts offer minimum guarantees.
In addition to these considerations, there are several other ways to customize the terms of annuities, catering them to your needs. Annuities can be planned to transfer payments to loved ones after death, to include special terms for spouses, or to increase payments over time, keeping up with inflation and rising costs of living.
Considering Dividend-Paying Stocks for Regular Income
Unlike bonds or CDs, dividend-paying stocks can provide regular payments, typically issued on a quarterly basis. These dividends can be reinvested to buy more shares, or used as regular income to supplement social security, pensions, and other unearned income.
Many reputable stocks, especially ones from well-established companies, are relatively stable and have the potential to earn a healthy return. However, it’s important to remember that the stock market is volatile, and there’s never any guarantees on investment.
Diversifying Your Retirement Portfolio
While many of the aforementioned investment strategies are low-risk, it’s always a good idea to diversify your portfolio. This spreads your money across a broad range of investments, so any one underperforming asset is balanced out by several other stronger-performing assets. This is especially important for those who choose to invest in stocks, which always have the potential to lose money.
Estate Planning and Passing on Your Wealth
Estate planning can ensure that your assets are managed and distributed according to your wishes, even after you pass away. Proper planning can also reduce the tax burden on your heirs, transitioning inheritance money as smoothly as possible.
The Importance of Having a Will and Other Estate Planning Documents
A well-written will specifies how your assets should be distributed, which can help avoid awkwardness, disagreements, or arguments regarding your estate. Other documents, such as powers of attorney, will also provide helpful guidance should you one day lose your ability to manage things like finances and healthcare decisions.
Strategies for Minimizing Taxes on Inherited Assets
There are several strategies you can use to reduce the tax burden on your heirs, ensuring that more of your money is passed down to your loved ones. These strategies include gifting assets while you’re still alive, using tax-advantaged accounts such as 401(k)s and traditional IRAs, and establishing trusts to take care of beneficiaries.
Understanding the Role of Trusts in Estate Planning
Trusts are a great way of managing and protecting your assets. They can help avoid messy disputes over your estate, protect your assets from creditors and provide specific instructions for when your assets are distributed.
There are two basic structures of trusts: revocable and irrevocable trusts. Revocable trusts can be changed or taken away by the creator at any point, whereas irrevocable trusts cannot be changed after being established.
Whether it’s establishing trusts or documents such as powers of attorney or your will, a little planning goes a long way — ensuring the estate you leave behind isn’t burdensome to your loved ones.
Work With a DCU Financial Advisor
Are you ready to come up with a better financial plan for your retirement? Speak to a DCU financial advisor today. Our friendly and knowledgeable staff can assist you with your financial planning, pointing you toward helpful investment opportunities such as our Certificate Accounts. Or learn how to grow your savings faster with our high annual percentage yield (APY) Advantage Savings Account, with dividends compounding on a monthly basis.
Apply to become a DCU member today and get the support you need to make your golden years truly shine.
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Please note, membership is required to open a DCU savings account. Visit our membership eligibility page for more information.
*Bonds, securities, and annuities are not NCUA-insured, not insured by any federal government agency, not guaranteed by DCU or its affiliates, and may go down in value.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
