How To Reduce Your Retirement CostsBy Paul Rubillo | Published December 18th, 2012
When coming up with a retirement plan, many Americans consider how much retirement income they’ll need in order to enjoy their current quality of life. We’ll look at how you can figure out the amount you need for retirement, and then go into how your can stretch those retirement dollars by cutting out extraneous and unnecessary expenses.
How Much Money Will You Need for Retirement?
Years ago, there was a general rule that you could get by in retirement if you were able to draw about two-thirds of what your average income was during your last five years of employment. Unfortunately, times have changed and several factors have come in to play to push that magic number higher for many retiring workers. Things can even more difficult for women in retirement, learn more about it in Retirement Considerations For Women.
The 2008 real estate and financial meltdown affected many retirement plans, and some of them have still not managed to recover. Some experts estimated that the average investor lost about five years worth of built-up equity in their investment portfolio holdings (stocks, real estate, CD rates, savings, etc.) during the crash and resulting recession, so it will still take longer to build this equity back up.
Today’s reality is that retirees will likely need anywhere from 90-100% of their average income to be able to support their current lifestyle. To calculate your expected retirement income, look at your 401K, pension plan and Social Security projections (every year the government mails a statement with what your estimated monthly social security payments will be) as the main sources for your revenue. Add those income sources up, and if the total is greater than your monthly expenses, congratulations — you should be OK. If the amount is less than your projected expenses, or you’d like to stretch your retirement dollars even further, there are many ways to cut your expenses.
Cutting Your Real Estate Costs
Downsizing to a smaller home is an option, but you have to consider what has happened to your real estate investment. Many housing markets went bust during the 2008 crash, so you should look into how much your home is currently worth, and whether it makes financial sense to move. If you are still carrying a mortgage, you will need to decide if the home you are currently living in makes sense for the size of your family (assuming most near-retirees are empty-nesters — no more kids living with them). It may make sense to look at areas to re-locate that are more tax-friendly if a move is possible.
If you’re staying within the same area, then it’s possible that other houses will be affected by real estate price cuts in the same way that yours has been. If this is the case, then it makes sense to move to a small home. Not only will you be able to bank some cash from the profit of selling your house and moving into a less expensive one, but you’ll also be dealing with less in the way of heating, electricity, property taxes and maintenance costs. Less house means lower bills and less things that can go wrong.
Eliminate Unneeded Insurance
As you get older, there are many types of insurance that simply don’t apply to you any more. Disability insurance, for instance, starts to make less and less sense. Once you stop working, there’s really no need for it whatsoever.
You may also want to look into cashing in a life insurance policy. Though you don’t need to have a specific reason in mind when withdrawing funds, most policy owners set up permanent life insurance knowing that they had it as a way to save money. Remember, you must always keep your term life insurance policy in tact. Checking up on your insurance policies should be part of your overall financial plan, which is very important to get in order.
Other Expenses to Cut for Retirement
Everyone should understand that high-interest credit cards with any outstanding balances should be eliminated as soon as possible. The way you shop needs to be more in line with how you expect to live comfortably. Getting rid of credit card debt and automobile loans are two things to address first.
The Bottom Line
The hope is that one has built up a nice retirement nest egg so that one’s quality of life can be maintained in the later years. Remember to keep funding all your retirement-focused accounts in the years up to you possibly deciding to retire. You need to keep your money working for you when it comes to 401(k)s, IRAs (perfect for high-quality dividend-paying stocks), and other pensions. Social Security should be last on your list when it comes to relying on retirement income.
As always, be sure to sit down with a financial planner to go over your individual situation and make the appropriate steps for your later years.
If the ratio of income to expenses is too close for comfort, you may want to consider working longer or possibly looking for a part-time job during retirement. There are many other reasons why it can actually be a benefit to avoid retirement.
The psychological downer of needing to work during retirement can be off-putting, but look at the bright side: you will remain sharper in your older years, and yes, being retired can get boring fast for many people who’ve been used to working.