When managing retirement on a fixed income, the instinct is often to cut costs to stretch savings. However, when a financial windfall, like an extra $5,000, comes your way, strategic spending can offer long-term benefits. Here are some ways to use this bonus wisely to promote financial security and boost enjoyment in retirement.
Invest in Low-Cost Index Funds
Retirement doesn’t mean you have to stop investing. Low-cost index funds can be an excellent choice for retirees who want to continue growing their wealth with minimal time commitment. According to financial expert Brent Chandler, low-cost index funds typically yield an annual return of about 7%. This makes them a suitable option for generating steady growth, even if you’re managing a smaller, retirement-oriented portfolio.
Spend on Personal Enjoyment
Retirement is a time to enjoy life, and if you have $5,000 to spare, using it to enhance your happiness can be worthwhile. Jay Zigmont, PhD, CFP, suggests that retirees who have covered their financial needs consider spending this extra money on things they love. Whether it’s exploring a hobby, taking a long-awaited vacation, or donating to causes you care about, intentional spending can make your retirement years more fulfilling.
A few ideas include checking off bucket list items, treating yourself to a personal indulgence, or even giving back to family or charity. Since retirement is about balance, feel free to enjoy this extra money while maintaining a sense of financial security.
Set Up a Revocable Living Trust (RLT)
If securing your legacy and easing the inheritance process for your loved ones is a priority, consider setting up a revocable living trust (RLT). This type of trust allows you to retain control of your assets while you’re alive and specifies how they will be distributed after your passing. Importantly, the Federal Deposit Insurance Corporation (FDIC) insures RLTs up to $250,000, and this can extend to $1,250,000 if multiple beneficiaries are included.
Estate planning expert Marty Burbank emphasizes that an RLT can help streamline asset management and avoid probate—a potentially costly and drawn-out legal process. Though setting up a trust involves some initial complexity, it offers the long-term benefit of protecting your assets for your heirs.
Allocate for Supplemental Healthcare
Healthcare expenses tend to rise as we age, and while Medicare provides essential coverage, it may not be enough for all needs. To address this, consider allocating some of your extra funds toward supplemental healthcare options, such as a Medigap plan, to cover Medicare gaps. Another option is to contribute to a Health Savings Account (HSA), which allows you to use pre-tax dollars for medical costs.
David Blain, CFA, underscores the importance of having a healthcare safety net in retirement to avoid eroding other savings. Preparing for these potential expenses early can prevent financial strain and ensure you’re prepared for any medical needs that arise.
Consider Long-Term Care Insurance
Long-term care is a considerable expense many retirees will face, with a projected average lifetime cost of around $120,900. Given that over half of people aged 65 and older are expected to need long-term care, investing in long-term care insurance can be a strategic move to protect your assets.
Burbank points out that long-term care insurance offers a buffer against the impact of rising medical costs, especially in cases where extensive or prolonged care may be necessary. By covering these expenses, this insurance can help keep your other savings intact.
Invest in Lifelong Learning
Retirement is an ideal time to invest in personal growth. Learning new skills or enhancing financial literacy can enrich your life and boost confidence in managing your investments. Consider using a portion of the $5,000 to take a class, enroll in a financial workshop, or buy educational materials that can deepen your knowledge and help you make informed decisions.
Diversify Your Portfolio
Retirement often prompts a shift in financial goals and risk tolerance. Use the extra funds to diversify your portfolio, perhaps moving beyond traditional stocks and bonds. Chandler recommends exploring options like Real Estate Investment Trusts (REITs), peer-to-peer lending, or dividend-paying stocks. These investments can create additional income streams that may help offset inflation and cover unforeseen expenses during retirement.
Pay Down Debt
If you still have any outstanding high-interest debt, using the extra $5,000 to pay it down can reduce financial stress and save on interest payments. CPA John F. Pace suggests that tackling high-interest debt, such as credit card balances, offers an immediate return by lowering future interest costs and eliminating monthly payment obligations. Reducing debt can free up resources and promote peace of mind, allowing you to enjoy retirement with fewer financial burdens.
Key Takeaways
A windfall of $5,000 in retirement can be more than a temporary boost—it can improve financial stability and personal satisfaction when used thoughtfully. Whether it’s expanding investments, securing healthcare options, or simply spending on personal enjoyment, small financial moves can lead to long-term rewards.
Is it wise to invest in the stock market during retirement?
Yes, investing in low-cost, diversified options like index funds can offer stable growth even in retirement, helping you manage inflation and extend savings.
How can I ensure my medical expenses are covered in retirement?
Medicare is essential, but a supplemental policy or HSA can help cover additional expenses not covered by Medicare.
What are the benefits of setting up a revocable living trust?
A revocable living trust simplifies asset distribution, avoids probate, and provides control over how assets are managed after you pass.
