Ten Tips for a Financially Sound Retirement

Social Security, Annuities

• 6. Use tax-efficient income streams

Retirees should “document, prioritize and categorize,” says CFP Branning. The idea is to “use the assets that we own to generate income in a tax efficient way.”

Determine your annual base or mandatory expenses—food, clothing, shelter, utilities, medical, and transportation—and discretionary expenses.

To avoid unnecessary taxes, retirees should only generate income that is needed to cover base expenses, says Branning.

“Most essential for retirees is generating actual net retirement income dollars, because not every dollar of income is equal from a tax perspective, " he explains. "Every dollar taken from tax-free accounts is actually worth a dollar in net terms, whereas a dollar taken from a taxable account may only be worth 80 cents,” given the tax rate.

• 7. Don't be an ATM to your kids or grandkids

That’s what CFP Fricke says.

Be smart about how you give away money.

Fricke advises grandparents to set up an investment fund with a goal that interests the child. “A grandparent 401(k)” he says. “To most teenagers, college isn’t that sexy and fun to be working towards. But for teenage boys, their first car, by golly, that’s something they’ll work for.”

For every dollar the grandchild adds to an investment or savings account, the grandparent can supplement.

• 8. Wait to tap into Social Security

“Nearly a quarter of older Americans rely on Social Security for 90 percent or more of their family income,” reports AARP.

To guarantee sufficient monthly payments during retirement, one should know the best time to tap into Social Security benefits.

“The Social Security claiming decision is one of the most important, yet complicated, retirement-related financial decisions,” says AARP's Setzfand.

Many experts agree that waiting pays off. If claimed too early, the benefits could decrease up to 8 percent a year. If you wait until the age of 70, the benefits increase—and by quite a lot.

Find the right time for you: AARP created the Social Security Benefits Calculatorto help people weigh the variables and compare estimated monthly benefits to make an informed decision.

• 9. Prepare for the unexpected

Update important documents every five years.

“Any time there’s a birth, death, divorce, marriage. Especially as people are living longer and longer, and with health-care advances being at what they are, it’s important to have a health-care surrogate or a health-care power of attorney,” says Fricke.

A health-care power of attorney is a legal document that appoints somebody to make medical decisions on your behalf if you can’t.

Retirees also should consider investing in long-term care insurance, which typically covers the cost of home care, nursing-home care, and assisted living, usually not covered by traditional health insurance. “They’re not covered much by Medicareand they’re only covered by Medicaid after you have spent all of your money,” says Richard Johnson, director of the Program on Retirement Policy at the Urban Institute.

When planning for retirement, don’t overlook care-giving. Family members may ask you for help. “A retired couple may wind up with family members living with them, being called to baby sit, taking care of a spouse,” says Dr. Osborne. Plan accordingly, as taking care of someone can cost money.

• 10. Enjoy spending within your means

Many retirees don’t live as comfortably as they could, fearing they’ll run out of money.

“When you’re 65, you don’t know how long you’re to live. ‘What if I live to 110?’ There’s a lot of uncertainty involved,” says Johnson.

Johnson says the solution is to buy an annuity. An annuity is a pot of your money that an insurance company converts into regular payments until one’s death.

The uncertainty diminishes. “No matter how long you live, you will receive a regular payment each year,” says Johnson.

But others say annuities involve risks.

“You lose long-term capital gain tax treatment on profits. You can’t offset gains with losses, and your heirs lose the stepped up tax basis if/when they inherit the account. Not to mention the high fees and big withdrawal penalties,” says CFP Fricke.