Learning how to cut down your monthly/yearly expenses before and during retirement is the one of the keys to living happily after leaving the labor market
It’s no longer shocking to find out that almost four out of every five people seeking financial planning guidance choose retirement planning as being their major priority. As retirement year draws nearer, priorities and goals are likely to be altered somewhat as you make the switch. That’s why it’s so important to have a financial plan in place to acclimatize to these changes.
Fear and indecision can become a driving force of emotions during retirement planning conversations as the future is mostly unpredictable, and the fear of a bad future is everyone’s nightmare.
According the 2016 State of U.S. Employee Retirement Preparedness report from Financial Finesse, only 35 percent of 55 to 64 year-old show confidence that they have enough to foot their bills during retirement.
If you are planning on retiring in 8 years from now or less you should already be running retirement calculations twice per year to see if your projected retirement savings will be enough to meet your income goals for retirement.
Creating a budget plan for retirement is suggested for you if you are 5 years or less from your planned financial freedom date. If you’re lost on the line, you either find more ways to bring more income or begin saving more money, working later in life than desired, investing aggressively and in diversified portfolio, or generating extra income in retirement in other ways (part-time employment, reverse mortgage, rental income, etc.).
Most people retiring or planning retirement believe that downsizing homes is a potential money saver for retirement; but in actual sense downsizing your own lifestyle is the real money saver and not the house.
If you are considering downsizing various aspects of your financial life prior to or during retirement, here are some things to consider:
Put your retirement expenditure plan to the test.
Firstly, make sure you actually have a budget or personal spending plan in place and ensure that all the plans in your head are carefully written down somewhere. This will help accomplish a few things.
Knowing what part of your spending gets the lion’s share will help you estimate your expenses during retirement.
In fact, you should endeavor to do more with your retirement calculations than just attempt to replace a certain percentage of your current income.
Create a budget plan for retirement that estimates the expenses you anticipate changing during retirement so you have a dollar amount set for your income goal.
One final benefit of putting your budget to the test is to see where you can free up some extra dollars today to increase your savings for retirement. You will be giving your retirement nest egg a much needed boost and reducing future expenses at the same time.
Handle your impending health issues now.
If you are worried about rising health care costs you aren’t alone. You can reduce out-of-pocket health costs if you take steps to better maintain your overall health.
Managing personal finances is similar to managing your overall health and wellness. Most of us usually know what to do, but the hard part is taking action and following through with the steps needed to proactively improve our health and well-being.
Reconsider your insurance coverage.
Some expenses such as long-term care and health insurance will remain necessary throughout your retirement years.
However, other insurance needs may be reduced or eliminated once you retire. As retirement nears, obtain an objective assessment of your recommended life insurance coverage amounts.
Ideally this assessment will be conducted by a financial professional who is not compensated for recommending one particular product versus another or holds a financial interest in you continuing to make premium payments.
Avoid student loan debt prior to your retirement (unless your retirement is still on track).
If you feel like there is no other way to fund your child’s education expenses – think again. You can borrow for your child’s education but not your own retirement.
This doesn’t mean you have to take out parental loans. If you do, be prepared for the consequences. If parent/student loans cannot be avoided, try to calculate your payoff time with retirement.
Seek advice before making significant decisions.
Downsizing should always be seen as an ongoing process that is needed during your working years and throughout retirement.
Look at it as a chance for a much needed financial check-up as you try to identify expenses and habits in your life that you can change.
If you are working with a financial professional, be sure to use your downsizing exercise as a reminder to set up a plan to eliminate debt and move on to a check-up of other important retirement factors such as savings, investments and estate planning.
Reduce your transportation costs.
If you have been making car payments throughout the majority of your career you’ve probably assumed car payments are just a fact of life.
Yes, it’s true that most of us need a car to get to work or manage normal everyday routines.
However, if your car buying history includes replacing your vehicle every 3-5 years with a brand new automobile you could be adding an additional expense to your financial plan.
Buying reliable used vehicles and establishing a car replacement fund prior to retire are alternative strategies to consider.
Pay Off High Interest Debt.
If you have high interest consumer debt (credit cards, personal loans) it usually makes more sense to pay off this debt with extra dollars from your expenditure plan.
One major exception is when you anticipate the growth of your investments to be higher than the interest you are paying on the debt.
Of course, stock and bond market returns don’t come with any guarantees whereas the interest saved in a debt reduction strategy is guaranteed.
Avoid the temptation to use a lump sum withdrawal from your savings account to pay off high interest debt.
The income taxes that will be due are often times significantly higher than the interest savings from this financial move.
Tactically pay off your mortgage.
In general, it is a wise financial move to time your mortgage payoff with your planned retiring date.
However, with interest rates still at relatively low levels this decision isn’t as easy for some people to make.
That being said, with housing expenses being one of the biggest household spending categories during retiring it can be quite beneficial to become mortgage debt-free.
Another alternative to paying off a mortgage prior to retirement is to consider a reverse mortgage.
Understand what “retirement” is for you.
In order to make the right decision when reducing your expenses you need to have a clear understanding of your life goals, values, and vision for the future.
Undergoing a comprehensive review of your alternatives will allow you to better define what financial freedom truly means to you.
The downsizing process may even allow you see a clearer path to get to that retirement destination sooner than expected.