Retirement is a big adjustment. Aside from figuring out what to do with all your newfound free time, you also have to fine-tune your finances.
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Since you’re no longer collecting a paycheck and other employer-sponsored benefits, you’ll need to make some big changes. This can feel like a lot at first, but as with any new chapter, you just need to work out the kinks.
Knowing what to anticipate in advance can help you plan better, making for a smoother transition. Here’s a look at six financial hurdles you will encounter in the first five years after you retire and tips to overcome them.
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Inflation
“Inflation and cost of living increases can erode purchasing power over time, impacting retirees’ ability to maintain their desired standard of living,” said Taylor Kovar, founder and CEO at 11 Financial. “Plan for inflation by incorporating it into retirement income projections and adjusting spending habits accordingly.”
To combat this, he recommended investing in assets that offer inflation protection, such as Treasury Inflation-Protected Securities or diversified equities.
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Sequence-of-Return Risk
“Essentially, this happens when your retirement and/or investment accounts have a poor period of performance at the same time that you are beginning to draw assets from these accounts to fund your living expenses in retirement,” said Chris Urban, CFP, RICP, founder at Discovery Wealth Planning.
To reduce this risk, he recommended setting up an account with safer assets, such as cash, CDs and/or money market funds.
“Ideally, you begin funding this account several years prior to retirement — perhaps depositing similarly sized installments each year,” he said. “Then, once you reach retirement, if your retirement and/or investment accounts have poor performance, you can withdraw from the account with safer assets and give your other accounts time to recover.”
He said this strategy can be helpful in multiple ways, as you’ll have the peace of mind in knowing you have multiple years’ worth of living expenses set aside that aren’t subject to the volatility of financial markets.
Healthcare
If you’ve spent your career on an employer-sponsored health plan, learning how much healthcare really costs can be a shock.
“Many early retirees struggle when they realize that they are no longer part of an employer-sponsored healthcare plan and that they must obtain private insurance, or all healthcare costs will be paid outright,” said Kim Gattis, senior vice president, manager of financial planning at UMB Bank. “To help prepare for these costs specifically, we suggest contributing to an HSA if you are eligible to save for retirement-related health expenses.”
Housing
“Housing is often the largest cost in retirement, which makes it a good place to start when considering what moves to make when trying to manage retirement expenses,” Gattis said. “Depending on your individual interest rate, many retirees choose to pay off their mortgage before retirement to eliminate that expense.”
After settling into retirement, she said retirees often realize downsizing or relocating might be a good idea.
Taxes
“When making a withdrawal from traditional 401(k)s and IRAs, you’ll be expected to pay income tax on each one,” Gattis said. “If your retirement income is over a certain amount, part of your Social Security benefit might also be taxed.”
However, she said utilizing certain tax strategies can minimize what the government takes from you.
“These strategies include moving to a state that doesn’t charge income tax and reassessing your investment holdings,” she said.
Emergencies
“It may seem surprising, but it’s important for retirees to have a separate amount of saved money within their savings account to help protect the income you’ll live on during retirement,” Gattis said. “Unexpected costs including health expenses and family emergencies may come up and reduce your monthly income — and you won’t be able to make that money back on a fixed income unless you go back to work.”
The last thing you probably want is to have to re-enter the workforce, so make sure you have an emergency fund to rely on before retiring.
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This article originally appeared on GOBankingRates.com: 6 Financial Hurdles You Will Face in the First 5 Years of Retirement