Money Management

Is It a Good Time to Sell and Downsize Your Home?

interior of a house - sell & downsize your home today

Many people blame the baby boomers for the housing shortage in the real estate market. According to stats, baby boomers hold the biggest share of real estate wealth in the U.S. And they do not sell their homes as they grow older.

Recently I have learned that there is approximately $8 trillion worth of home equity locked up in older people’s homes.

Housing experts agree that the baby boomers’ generation is healthier than the previous generations. That is why they do not need to move in with their kids or to a nursing home. Also, they do not want to move because they want to age in place. Most of them like their neighborhoods and their friends.

But with skyrocketing home prices, some people think that now is a good time to sell and downsize your home before the real estate market starts cooling off.

Downsizing can be the right path for many baby boomers who want to cash out their biggest asset and live out their golden years with more money in the bank.

Everyone likes the idea of making a profit by selling a big house and buying a small one. But be careful with this decision because today’s market might present some challenges.

High home prices, low inventory

For a long time, downsizing has been associated with empty nesters living in a big house with no kids.

A popular retirement planning approach is to sell a big house you raised your kids in and then go and buy a smaller less expensive house. The best part of this approach is that you can use all your home equity you accumulated over the years to pay for your life in retirement.

But in recent years, the concept of a smaller house has captured our society. Downsizing has become more attractive for many financial reasons.

Less space means less money, less maintenance, and less hassle overall. And the smaller space the easier it is to furnish and decorate. Also, you can spend the saved money on something more important such as travel, hobbies, and time with the family.

After all, a smaller space has more value not only for your wallet but for your lifestyle.

However, with inflated home prices downsizing is not as affordable or profitable as it was before. If you think about cashing in on your home’s equity and downsizing to something smaller and cheaper, you might meet some challenges.

If you decide to sell now, you will be selling at the top of the market with high home prices and low inventory. But on the flip side, you are going to spend more money for your next purchase even something smaller.

When downsizing you will be looking at the smaller homes with modest square footage. Keep in mind that there are a lot of buyers competing for this kind of purchase. Smaller homes, condos, and townhouses became very popular lately and that often leads to steep bidding wars.

In many cases that smaller home you want to buy may end up being more expensive than you have originally planned.

When you sell and downsize your home do not forget about other expenses such as real estate agent fees, attorney fees, real estate, and capital gain taxes.

Prepare to pay 5 to 6 percent of the purchase price to cover realtor agent fees, which are typically paid by the seller. Add to that an extra 2 to 4 percent of the price to cover attorney fees, transfer taxes, and other expenses called ‘closing costs’.

So, if you sell your home for $750,000, you could end up paying $37,500 in realtor fees and $15,000 minimum in closing costs. Total of $52,500 just to sell your house.

Capital gains tax is another costly part of selling your home. Per IRS rules you do not need to pay capital gains taxes on the sale of your home if the profit is less than $250,000 (for an individual) or less than $500,000 (for a couple). But if your sales proceeds are higher than these numbers you will owe to IRS as much as a 20 percent capital gains tax on the profits.

If you live in a state where homes have appreciated in value significantly over the years, it might cost you a lot in capital gains taxes. For example, after selling your home for $750,000, you will pay to IRS $50,000 capital gains tax on a $250,000 profit.

High mortgage rates

Mortgage rates have increased more than 2.5 percent since the beginning of this year. And if you are planning to finance your new home it will be significantly more expensive than it was a few months ago.

According to Freddie Mac, today’s average mortgage rate is 5.78 percent on a 30-year loan. By comparison, in 2021 a 30-year fixed rate mortgage was only 2.93 percent.

If you have a mortgage on your current home with a low-interest rate and looking to downsize and borrow money for your next home, keep in mind that the rate you can get will be much higher than your existing one.

Unless you want to pay cash for your new home, downsizing might not be worth it financially if you want to apply for a new mortgage.

If you are retired and live on a fixed income, downsizing will give you some significant savings down the road. But you have to compare it with how much interest you will pay over the time of the loan.

With the average interest rate of 5.78 percent on a 30-year loan, you will pay around $443,000 in interest costs on a $400,000 home.

Also, qualifying for a mortgage might be a problem if you are not working. Keep in mind that most of the mortgages are issued and approved based on your income and not on your assets. If you are not working, it will be harder to get financing because you cannot show the constant stream of your income.

Moving cost is growing

We all know that moving is stressful. Sorting through your belongings, packing, and cleaning can be overwhelming. And with high inflation and high gas prices, your moving costs will be expensive.

According to the latest report from the Bureau of Labor Statistics, the annual inflation rate in May 2022 was 8.6 percent. It is the highest level since 1981 as measured by the consumer price index.

In today’s world everything involved in a move will cost you more – movers, truck rentals, supplies, storage, etc. In addition to downsizing your home, you will need to downsize and replace your furniture – replacing a big sofa and club chairs with a smaller couch, a king-size bed with a queen-size bed, or a big dining table with a smaller kitchen-size set.

Do you still want to sell and downsize in today’s market?

There are still many financial reasons to sell and downsize in today’s market. And if you are getting closer to retirement, downsizing can come with lots of benefits.

If you are ready to sell on the top of the market and do not want to wait for the interest rates to settle because you will be paying cash for your next purchase, then go for it. Even with the high-interest rates but low inventory, sellers are still demanding a premium for their homes.

For example, you carry a $100,000 mortgage. If you want to sell your home for $600,000, then downsize to a $350,000 smaller home or condo, you might walk away with a nice profit.

Also, you can buy your next smaller home with cash, without having to take out a mortgage.

You still have to carefully evaluate the market where you buy your smaller home. Look at home prices, the number of listings, competition, and how long most houses sit on the market.

Downsizing your home can help you save a lot of money on housing costs. Today, rising property taxes are a result of higher home values. If you downsize from a $600,000 home to a $350,000 home in the same neighborhood, you will pay fewer taxes overall.

With a smaller home, you will also spend less money on maintenance and repairs, heating and cooling, home improvement, and decorations.

Other alternatives to downsizing

If you do not want to sell in today’s market, there are other alternatives to downsizing if you want to wait for interest rates to settle, and housing inventory to increase in the next few years.

Once you are retired, you can rent your home and move to a rental. It will allow you to avoid the high home prices and high mortgage rates today’s market comes with.

Also, if you need extra cash but do not want to sell your home, you can apply for home equity loans, HELOCs, or consider a reverse mortgage.

There are still many people who would prefer to stay in their homes and retire in place. They want to remain in their neighborhood for life. In this case, homeownership might provide several options to fund your retirement without the risk of stock market investments.

One of the options is a reverse mortgage.

If your home has gained a lot in value, it makes sense to calculate the numbers first to see if it might be cheaper to stay put and take out a reverse mortgage.

Your home will continue to appreciate in value. And by staying put you will avoid paying capital gains tax completely. With taking out a reverse mortgage, you will be able to get the cash out to pay for your living expenses in retirement.

‘A reverse mortgage is a loan available to homeowners, 62 years or older that allows them to convert part of the equity in their homes in cash’.

In simple words, as an older homeowner, you will be allowed to borrow money against the value of your current home.

What are your thoughts on selling your home in today’s market? Share your ideas with us in the comments below.

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7 Essential Steps for a Mid-Year Financial Checkup

by Maggie Leave a Comment

It has been a turbulent year with the ongoing covid-19 crisis, a war in Ukraine, high inflation, and a volatile stock market.

If your finances are in a different place than they were at the beginning of the year, you are not alone. Also, if you are getting closer to retirement, you need to make sure your finances stay on track.

These 7 essential steps for a mid-year financial checkup will help you adjust your spending, increase your retirement savings, evaluate your debt and investments, gather important documents, and prepare your finances for the following months.

Step 1. Review your current budget and monthly spending.

Take some time to review your budget and monthly spending.

Have you been sticking to your planned budget, or you are overspending in some categories? Your life may have changed since the beginning of the year, and the mid-year checkup is a perfect time to adjust your budget accordingly.

How to start?

Look at your credit card and bank statements, see what expenses could be avoided, and plan to cut them by the end of this year.

Make sure to account for major life changes or upcoming big expenses that may change your financial needs such as retirement, a job change, relocation to another state, or purchasing a vacation home.

Keep in mind, that balancing your income with your spending is the key to saving more money.

By adjusting your budget, you will avoid falling into the overspending trap. Nobody likes to do budgeting. But a budget is an important part of your financial well-being. Therefore, take the necessary steps to stay on top of your finances for the rest of the year.

Step 2. Evaluate your retirement savings.

Savings is the lifeline to financial security. And yet, many people do not put enough time into managing their savings.

Financial experts recommend saving 10 to 15 percent of your income. However, it is so easy to miss this target. After you have adjusted your monthly budget, check your monthly and annual savings rate.

The first step is to look at how your retirement savings has stacked up. Have you maximized your retirement plan contributions? If your income has gone up during the past 6 months, have you increased your retirement contributions?

If you have not this year, make it a goal to increase your contributions to retirement plans such as 401(k), IRA, and Roth IRA next year.

The important thing to remember is that retirement plan contributions allow you to save a lot of money on current taxes and not miss any employer contributions.

When you are a few years away from retirement, being short on retirement savings can be a problem. A mid-year checkup helps you reassess your monthly expenses so you can make necessary adjustments to your spending.

If you have set up your savings rate at the beginning of the year, you will have another 6 months to make up for the lost savings.

How to evaluate your retirement savings?

Make an inventory of all your retirement accounts.

If you are getting closer to retirement, it is important to make an inventory of all your retirement accounts balances and contributions. It helps to see how much you have saved and how much you can withdraw from your retirement savings.

First, make a list of every retirement account you have. The retirement accounts should include 401(k) or 403(b), IRA, Roth IRA, or Roth 401(k). Then add account balance and current contribution.

Second, review how much you contribute to your current retirement savings plan. Have you maxed out your retirement savings for this year?

The 2022 contribution limits are:

$20,500 for 401(k) retirement plans. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $27,000.
$6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people aged 50 or older is $1,000. So, you can save up to $7,000 with your pre-tax money (IRA) and after-tax money (Roth IRA).

Even if you cannot max it out, see if you can increase your contributions even by 1 percent. Another option is to start reducing expenses in your budget, so you can put more money into your retirement savings.

Basics of Retirement Accounts

Step 3. Assess Your Debt.

The middle of the year is a great time to sit down and check your progress on paying down your debt.

A good piece of advice is to divide your total debt by your income. That ratio should get smaller over time as you reduce your debt. According to financial experts, your debt-to-income ratio should be zero by age 65.

Look at your mortgage, credit cards, car loans, or personal loans and make a list (if you don’t have one) of every single outstanding debt.

woman counting on calculator - a mid-year financial checkup

There are two strategic and popular methods to get out of debt faster.

The Avalanche method helps to reduce the debt that carries the highest interest rate. The Snowball method helps to get rid of debt with the lowest balance first, and then move on to the next lowest one.

If you are only 5 to 7 years before retirement, you should consider paying off all your debt before you retire including a mortgage. Getting into retirement with any kind of debt will put a significant burden on your lifestyle.

When you are working, you have years of earned income to pay a mortgage, credit card, student, or any other kind of loan. But once you retire, you will be living on a fixed income.

When you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, big withdrawals from retirement funds could push you into a higher tax bracket.

To pay off all debt including a mortgage might not be realistic for everyone. However, the less debt you have, the better you are prepared financially for retirement.

Step 4. Look at your investments and rebalance your portfolio.

Things change all the time in the finance world, and it was no different in the last 6 months when the stock market was shifting.

We all noticed that it has been a volatile time for financial markets. If you have been afraid to look at your statements, it is time. A mid-year is a perfect time to look at your portfolio and review where your investments are.

Take the opportunity to review your asset allocation and make sure your portfolio is diversified and invested for growth.

You should have a mix of stocks, bonds, mutual funds, and other assets that fits your retirement goals. If the current market caused a shift in your portfolio, it needs to be corrected to maintain the diversification you originally planned.

If you do not automatically rebalance your portfolio, recent losses or gains may have pushed your asset allocation out of balance. Even though your portfolio has done well, you want to make sure you stay within your percentage goals.

It can be tempting to stay away from stocks to reduce the risk of losing money in your retirement funds. But stocks provide growth and investing for growth is important at this stage of your life. If you retire at 65 and spend 20 years in retirement, you need to have enough growth to make your money last that long.

You need to remember that a well-balanced portfolio will help you get through market downturns. Also, it will generate a retirement income to cover your living expenses.

How to Set Up Your Retirement Portfolio

Step 5. Check your emergency fund.

A solid emergency fund is helpful when financial troubles come your way. Most financial planners recommend having 3 to 6 months’ worth of living expenses to be tucked away.

The past two years of a global pandemic and current high inflation were hard on most of us. But these past years have shown how important it is to keep some money in a safe account, so you can cover your bills if your income stops.

It is a good idea to keep your emergency fund in a money-market account or other accessible account, so you know the money is right there if you need it.

Also, if you have depleted your emergency fund, make it a goal to re-build the fund in the next 6 months. One of the best things you can do in the remaining time of this year is to make sure you have an emergency fund.

Step 6. Check your estate planning documents.

Another essential part of a mid-year financial checkup is the status of your estate planning documents.

You should have the 4 essential estate planning documents: a will, a revocable living trust, a general durable power of attorney, and a health care proxy. If you do not have these documents, I recommend making an appointment with an estate planning attorney.

If you already have these documents, keep them up to date and make sure you have suitable executors, trustees, and guardians in place.

Also, make sure that the list of your beneficiaries is up to date as well.

If you have welcomed a grandchild to the family do not forget to add his/her name to the list. Additionally, if there has been a change in the family such as a marriage, divorce, or death, make sure to update your beneficiary list.

Step 7. Update your goals.

I encourage you to look at all your financial and retirement goals and see where you are.

Your goals might not be achievable if your life situation has changed. For example, if you plan to retire at 65, but you are short on retirement savings, you might have to continue working for a few more years.

Major life changes such as marriage, divorce or death, relocation, adjusting to new living arrangements, loss of job, etc. can have an enormous financial impact. A mid-year review can help you adapt your financial goals to reflect these changes.

Take some time to review your goals and determine if you are taking the necessary steps to achieve them. And if you ignored them for the first 6 months, now is the time to create a plan for the rest of the year.

You can create a new budget, reduce your expenses, increase your contributions, start reducing your debt, and a lot more.

Final thoughts

A mid-year financial checkup is a great strategy to help you stay on track with your financial well-being. It is easy to fall into bad spending habits, get off track with your budget, forget about your investments and ignore your financial goals.

But with a mid-year checkup, you can get a fresh start and set new goals. You still have plenty of time before the end of the year to reflect on your priorities and what you want out of life.

What is on your mid-year financial to-do checklist?

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Should I Pay Off a Mortgage Before Retirement?

by Maggie 2 Comments

woman holding for sale sign - pay off a mortgage before retirement

For many of us, the mortgage debt is the largest in our budgets. That is why entering retirement debt-free seems ideal for many people.

Getting rid of a big debt could save you thousands of dollars in interest and free up money you can add to your retirement savings or just reduce your expenses in retirement.

It is my dream to pay off our mortgage before we retire. But I do not think it is possible. And I am not alone. According to stats, more and more people retire owing money on their homes. The Federal Reserve’s Survey of Consumer Finances showed that 37.6% of households of people aged 65 to 74 had a mortgage in 2019.

We all know that it can take decades to pay off your mortgage. But does it always make sense to pay off a mortgage before you retire?

Reasons to consider paying off your mortgage before retirement.

There are many reasons to consider when deciding should I pay off my mortgage before retirement or not:

You may be able to retire sooner.
You will have one less bill to pay each month in retirement.
It will provide you with more income in retirement.
Paying off a mortgage before retirement can reduce stress.

Also, it makes sense to pay off a mortgage before retirement:

If the house is worth more than the mortgage balance.
If the interest rate on your mortgage is higher than the rate of return on your investments.

Here is a related post you might want to read:

How to Use a Home Equity in Retirement

Benefits of paying off your mortgage before retirement.

Most people would be better off not having a mortgage in retirement. Getting into retirement with an unpaid mortgage will put a burden on your lifestyle.

When you are working, you have years of earned income to pay off a mortgage. But once you retire, you will be living on a fixed income. And when you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, large withdrawals from retirement funds could push you into a higher tax bracket.

Frankly, it will make your retirement life a lot harder if you must continue to pay a mortgage when you are not working. In addition to that, you still have to spend money on property taxes, homeowner’s insurance, maintenance, and repairs.

The simple fact that you have lower housing costs means you will need less income to cover this essential expense. Also, you will have more retirement income left for other retirement expenses.

Being debt-free gives you more freedom and money left in your pocket to enjoy your golden years than struggling to pay off the mortgage.

Roman and I refinanced our house many times. But even with a low-interest rate of 2.5 percent, the mortgage payments take the biggest chunk of our budget.

Here is a list of benefits of paying off your mortgage before you retire:

Give you peace of mind
Provide you a place to live without worrying about monthly payments
Reduce your retirement expenses
Saving you money on interest

How to pay off your mortgage before retirement:

Refinance to a shorter-term loan. One way to pay off your mortgage faster is to refinance to a shorter loan term. For example, you can apply for refinancing your mortgage from a 30-year to a 15-year loan. That can put you on the fast track to paying off your mortgage.

However, it is important to remember that a shorter-term loan means higher monthly payments. Make sure your budget can handle the higher payments each month.

Refinance to a lower interest rate. Another smart option to reduce your mortgage debt is refinance it at a lower rate. In 2020 Roman and I refinanced our mortgage with Ameri Save Mortgage Corporation at 2.5 percent. It helps us bring down our monthly payments and save up to $500 a month.

Make an extra payment each month or each quarter. Look at your mortgage balance and figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly.

Making an extra payment 4 times in one year could remove 10 years from your payoff date.

Every dollar you pay above your regular monthly payment helps speed up your payoff date. It does not mean that you have to start doubling up your monthly payments. Simply adding an extra $100 a month to the principal can speed up your payoff date for 5 years.

Switch to bi-weekly payments. Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments.

When you switch to a bi-weekly mortgage payments program, you split your payment in half and pay twice each month. There are 52 weeks in a year. If you switch to bi-weekly payments, you end up making 26 payments which are equal to 13 monthly mortgage payments – one extra payment yearly.

With this strategy, you will be able to knock off a few years of your mortgage balance and reduce the amount of interest you pay on the loan.

Put extra cash towards your mortgage. Whether it’s a bonus, tax refund, salary raise, or inheritance, put every dollar towards paying down your mortgage debt.

Reasons not to pay off your mortgage before you retire.

Rushing to pay off your mortgage before retirement may not be a good idea for many reasons:

Paying off your mortgage early could trigger a penalty
You may be better off investing the money
You may need to borrow against your home equity later
You will be paying off your mortgage with savings

Tax benefits. Your mortgage interest is tax-deductible.

If you are still working and in the 35% tax bracket, every dollar you pay in mortgage interest saves you 35 cents in federal income taxes. Also, you save money on state income taxes.

A mortgage is a low-cost debt. A mortgage is one of the least expensive loans available.

If you have a credit card debt, it often comes with a higher interest rate than a mortgage. Do not rush to pay off a 2.5 or even 3.5% mortgage if you have credit card loans or other debt you are still paying off at 18 or 20% rates.

It is better to save for retirement than pay off a mortgage. As I mentioned above, mortgages are often the cheapest money you will ever be able to borrow.

Typically, mortgages have a lower rate and even fixed-rate, helping to ensure that borrowed money remains cheap for the next 15 or 30 years. That means people have the opportunity to put funds elsewhere, such as in savings and retirement accounts.

Thanks to compound interest, a dollar you save and invest today has more value than a dollar you invest 5 or 10 years from now. That is because your invested money will be earning interest on top of interest for a long time. For that reason, it makes more sense to start saving for retirement when you are younger rather than focus on paying off your mortgage.

What to do if you cannot pay off your mortgage before retirement?

Unfortunately, not everyone can pay off a mortgage. Retiring with mortgage debt is becoming a more common scenario.

person holding a house keys - benefits of paying off mortgage before retirement

To pay off a mortgage before retirement might not be realistic for everyone. If you are like me and worry about how to afford mortgage payments in retirement, there are several options to consider:

Downsizing. Your home is one of the biggest investments.

If you have been living there for a long time, your home went up in price and accumulated a lot of equity. One of the ways to get rid of mortgage payments and home maintenance bills is to sell the house.

If you cannot afford to pay off your mortgage, you might consider selling your home. You can sell the big house and trade it down for a smaller house or a condo. Or you can move to a cheaper area and pay cash for your new house.

Invest equity. Do you want to deal with the hassle of homeownership in retirement?

Maybe you rather spend time traveling and visiting family and friends. In this case, your option will be to sell your home, invest cash, and enjoy living on rent and mortgage-free.

Investing the cash from home sales will bring you additional income in retirement. If you let it grow for 10 years in your investment portfolio, and it might be enough to pay cash for your next house or a condo if you are tired of renting.

But many people would prefer to stay in their homes and retire in place. They want to remain in their neighborhood for life.

In this case, homeownership might provide several options to fund your retirement without the risk of stock market investments.

In this case, consider a reverse mortgage. Those people who have big equity built up in their homes could apply for a reverse mortgage. This type of loan can be also used to pay off the existing mortgage.

A reverse mortgage is also known as a home equity conversation mortgage (HECM). It provides income to retirees and does not require monthly payments. You still have to pay taxes and home insurance, and you will be responsible for maintenance.

The best part is that you will receive a portion of your home equity in cash without requiring you to move out. But the loan has to be repaid when the owner sells the house, moves out, or dies.

A reverse mortgage can be flexible, and you can take HECM as a line of credit (HELOC), lump sum, or annuity.

One option is to use HECM for your medical or long-term care expenses late in life when you run out of money.

Another option is to set up an annuity to increase Social Security and any other retirement income you will receive.

However, reverse mortgages can be complicated. There are many terms and conditions, and it is a relatively expensive way to borrow money. So, make sure to do your research to understand all the pros and cons, and talk to a loan specialist.

Your Guide to Reverse Mortgages

Should you pay off your mortgage before retirement if you could? Share your thoughts in the comments below.

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How to Cut Expenses Before You Retire

by Maggie Leave a Comment

woman with laptop - cut expenses before retirement

If you are near retirement age, these tips on how to cut expenses will help you save more and give you the freedom to retire sooner.

And if you are still working, you are in a great position today to improve your life in retirement because you still earn an income. Your remaining working years could be a great time to explore some smart options of cutting expenses before you stop working.

According to the Bureau of Labor Statistics, Americans aged 65 and older spend about $48,000 per year ($4,000 per month) on average.

In retirement, most of your money will be spent on 3 big categories – housing, transportation, and medical.

According to the Bureau of Labor Statistics Consumer Expenditure Survey, for adults aged 65 and older:

Housing represents 34% of spending
Transportation represents 16% of spending
Health care represents 13% of spending

1. Reduce housing cost.

I do not have to tell you that your housing costs eat up a big chunk of your money every month. Even in retirement, the cost of housing will be your biggest financial burden.

Bringing an unpaid mortgage with you into retirement will cause a lot of financial stress each month.

The cost of homeownership for the average American household is $13,153 annually without the cost of a mortgage.

Based on my own calculations, Roman and I spend $28,400 a year on mortgage, insurance, taxes, utilities, and maintenance. It takes 25 percent out of our annual budget without the cost of home improvements and major repairs.

According to statistics, the average retiree household spends around $17,472 per year ($1,456 per month) on housing expenses including mortgage, rent, property taxes, insurance, maintenance, and repairs.

Pay off your mortgage.

You will make your retirement life a lot harder if you must continue to pay a mortgage when you are not working. Plus, you still have to spend money on property taxes, homeowner’s insurance, maintenance, and repairs.

The simple fact that you have lower housing costs means you will need less income to cover this essential expense. In addition, you will have more retirement income left for other retirement expenses.

Retirees often have to withdraw money from retirement funds to cover their mortgage payments. Unfortunately, those withdrawals typically trigger more taxes.

Look at your mortgage balance and figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly.

Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments.

Refinance your mortgage.

Another smart option to reduce your mortgage debt is to refinance it at a lower rate.

In 2020 Roman and I refinanced our mortgage with AmeriSave Mortgage Corporation at 2.5 percent. It helps us bring down our monthly payments and save up to $500 a month.

Unfortunately, not everyone can pay off a mortgage. Retiring with mortgage debt is becoming a more common scenario.

If you cannot afford to pay off your mortgage, you might consider selling your home.

Downsize your home.

Are you an empty nester? Then it might be the perfect time to reconsider your living condition.

The smart choice would be to sell your home and move to a smaller home or condo. By reducing your housing costs today, you can get extra cash into your pocket before you retire.

Look at the advantages of a smaller home or condo:

A smaller mortgage
Lower property taxes
Reduced homeowner’s insurance premiums
Fewer maintenance costs
Less yard work, especially if you get a condo

To help you get started, here are a few useful articles you may want to read:

2. Reduce transportation cost.

According to statistics, the average retiree household spends around $7,492 a year ($624 a month) on transportation.

The cost of transportation is likely to drop when you stop working. While you will not spend money on commuting anymore, not all your transportation expenses will disappear.

We all know that cars are expensive. Not only you have to pay for gas, maintenance, and repairs, but you also need to insure them. With inflation and gas prices going up every year it will make your life on a fixed income more difficult.

If you need a car, your goal should be to spend the least amount of money on a reliable car.

Here are a few options of how to reduce the costs of your vehicles before you retire:

Downsize your vehicles.

One of the best ways to reduce the cost of transportation is to downsize your vehicles.

If a large chunk of your income goes into maintaining several cars or driving luxury cars, I would suggest downsizing or choosing a different car. Going from two cars to one or downgrading to a less expensive car can help you significantly reduce the costs of gas, auto insurance, and maintenance.

According to LendingTree, the cost of a new car, including additional costs like fuel, insurance, and tires is between $23,903 (a small car) to $57,267 (a full-size car) per year.

However, if you have already paid off your car, it makes more sense to keep it as long as you can. That way, you do not need to worry about monthly car payments. Instead, you can take that money and use it to pay down any other debts or save more for retirement.

Buy a used car.

Many people choose to lease their cars because they want to have a new car every few years. Leasing works better if you are on the road for business and can deduct the lease payments.

But if you are near retirement, buying a good used car rather than a new one for the image will help you afford retirement sooner.

Most of the vehicles lose about half of their value by the time they are five years old. So, if you decide to buy a used car, a three-year-old car will cost you less in upfront expenses and maintenance.

Between paying on average $40,000 for a new car, you can save a lot of money by spending on a used car only $22,351(at the end of January 2021).

A useful post from LendingTree: Should I Buy a Used or New Car?

Use public transportation.

In case you are planning to move from the suburbs to an urban area, you should sell your cars and take advantage of public transportation.

In this scenario, you do not need to worry about the costs of your vehicles at all. Just buy a monthly public transportation pass. And when you want to go on a road trip, simply rent a car.

Use car-sharing services.

Most urban cities also have car-sharing services that give you easy and affordable access to a car for temporary needs.

Also, using services like Uber or Lyft can help you save money without the regular monthly costs associated with owning or leasing a car. With the gas prices are going up every year, you do not need to worry about that additional expense.

3. Get rid of a high-interest debt.

High-interest credit card debt can be one of the biggest burdens on your financial life in retirement.

Most of the credit cards come with high-interest rates – 18 to 20 percent.

credit card - cut credit card debt before retirement

If you carry a big balance on your credit cards, you will be stuck paying that required minimum every time your credit card bills come due.

Keep in mind, that if you bring a mortgage, high-rate credit card debt, and maybe a car loan into retirement, you will put a lot of pressure on your limited finances.

There are two most popular debt payment strategies:

The snowball strategy
The avalanche strategy

The snowball strategy – you are paying off debt from smallest balance to largest.

First, you focus on paying off the credit card with the smallest balance. Then you move on your next smallest credit card bill until all credit card debt is paid off in full.

The avalanche strategy – you organize your payments by interest rate – from high to low.

First, you pay off debt with the highest interest rate as quickly as possible (even with extra money). Then you move on to the card with the next highest interest rate.

I recommend focusing on your highest-interest debt first because the longer it takes you to pay it off, the more money you will pay towards interest.

And if you can help it, do not add any more debt to the pile while paying off old debts.

A helpful post:

How to Pay Off Debts Before Retirement

4. Review your insurance coverage.

Getting closer to retirement might be a good time to review how much you spend on insurance and how to cut that expense.

Life Insurance

First, you might look at your life insurance and decide if you still need it.

The main purpose of life insurance is to replace lost income. If your kids are grown and you no longer have any dependents who will need financial help after you die, it might be wise to drop policies. Paid-up policies can be sold.

If you have a term life policy, make sure you understand whether the payout at your death is worth the cost of the premium you are paying today.

Auto and homeowners’ Insurance

You might also look at your deductibles for your vehicles and homeowners’ insurance policies.

When you are still working, it makes sense to set your deductibles low. But low deductibles increase the amount you pay in insurance premiums. So, when you raise your deductibles, you will pay less for your vehicles and homeowners insurance premiums.

Once you retire, you might want to pay less for your insurance policies so you will have more money to cover your daily expenses.

Healthcare

In retirement many people will spend most of their money on health insurance, medical services, and drugs, as they age.

I my articles I often write about the cost of medical expenses in retirement. Because I want to remind my readers that healthcare is going to be their second biggest expense after housing, and they need to plan for it.

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple may need around $300,000 saved (after tax) to cover healthcare costs in retirement.

Here is a helpful article you might want to read:

How to Plan for Rising Healthcare Costs

Most people will be eligible for Medicare at age 65. But if you plan to retire before age 65, you will need to find a separate plan to cover your medical expenses.

Individual health insurance is expensive and could cost more than $1,000 a month. Make sure to shop around for the best prices.

Even being eligible for Medicare brings its own set of challenges because it does not cover all medical expenses.

Medicare is not free. It does not cover premiums, deductibles, co-pays for doctor visits, dental and vision care, long-term care, personal care, and other expenses.

Long-term care insurance is the most recommended way of planning for future expenses.

Long-term care insurance will help you not be a financial burden on your family if that time comes. It will cover nursing homes, assisted living facilities, and in-home care.

After all, you do not want to leave your husband or wife with nothing because the entire nest egg was spent on taking care of you.

Final Thoughts

If you do not know what your expenses look like in retirement, it will be difficult to predict how much money you need to save for the future.

But if you can get a sense of what to expect, it will be relatively easy to cut your expenses in these categories before you retire.

Have you had more ideas on how to cut expenses before retirement?

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5 Best Ways to Withdraw Money from Retirement Savings

by Maggie Leave a Comment

woman with laptop - best ways to withdraw from retirement savings

There is a lot of information on how to save for retirement but not much on how to withdraw money from your savings when you retire.

Your retirement savings and Social Security (and pension if you are lucky) are all the money you have in retirement. And these savings need to last and support your lifestyle during the next 20 or 30 years.

As a pre-retiree, I already know that I cannot withdraw whatever I want from my retirement funds and expect my savings to last for a long time. Life does not work that way. Without a withdrawal plan, Roman and I will run out of money fast, and then it will be too late to go back to work.

Retirement Savings Withdrawal Rules:

In general, retirement planning consists of two phases – the accumulation phase and the withdrawal phase. After decades of working hard and saving for retirement, you need to shift gears and learn how to spend what you have saved.

Traditionally people work and save 15 percent into their retirement funds and then retire on average at age 65 or older. When you retire, your earned income will disappear, and you will need to pay for the cost of living out of your savings and Social Security.

In addition to that, you need to figure out how to convert your retirement savings into a reliable stream of income that can support you through your 90s.

Unfortunately, you cannot keep your money in retirement accounts forever.

The federal government is going to force you to start taking money out at age 72 if you are not working anymore. If you are still working at age 72, you have to start taking money from your IRA and old 401(k) from your previous job. But you can delay taking withdrawals (RMDs) from your current 401(k) until you stop working.

A general rule to remember – keep the money in your 401(k) or IRA until you reach age 59 ½. If you withdraw any money before that age, you will be hit with a 10 percent penalty fee on top of the regular income tax.

In this post, I want to show you the 5 best ways to withdraw from your retirement savings so your money will last for a long time.

1. Follow the required minimum distribution (RMD) rules.

The IRS requires us to start taking a minimum distribution (RMD) from tax-deferred accounts when we turn 72 years old unless we are still working.

If you do not make it on time and fail to withdraw the required amount each year, you will owe IRS a large penalty fee. In addition to the penalty fee, you will still need to withdraw the required amount of money, and pay income tax on it.

The withdrawal amount depends on your age, life expectancy (the longer your life expectancy is, the less money you must take out), and your account balance.

There are two types of retirement accounts:

Tax-deferred – 401(k), IRA, Roth 401(k)
Tax-free – Roth IRA

The minute you start taking money out of 401(k) or IRA, you will have to pay taxes on your withdrawals. If you are in a high tax bracket, you will owe a good chunk of money to IRS. Although, if you are wealthy enough and do not need money from your retirement accounts, you still must withdraw them to follow the rules of RMD.

Keep in mind that many financial firms can help you calculate an RMD.

2. Minimize mandatory distributions.

One of the best ways to withdraw money from retirement accounts and lower your taxes is to minimize mandatory RMDs. Because when you start taking money out of tax-deferred accounts, you will face an increase in your taxes.

Remember – that was the deal you had signed up when you got a tax break on the money saved in a traditional 401(k) or IRA. It was deducted from your taxable income, and retirement is the time to pay it back.

In retirement, you would owe income tax on withdrawals.

need help poster on taxes-taxes on withdrawals in retirement

That means, preserving your tax-deferred accounts until an RMD kicks in is not a great idea.

Someone who is 70 years old will have an RMD of approximately 3.5 percent of the account value, but by the age of 75, an RMD will be 4.5 percent. And at the age of 80, you will require to withdraw at least 6 percent. These numbers are just an example to show the more money you have the more you have to withdraw.

Keep in mind that an RMD will be much higher to withdraw as you grow older unless you start withdrawing money when you retire. And as I mentioned above you might be pushed into a higher tax bracket.

The main thing to remember is that every year you will need to take an RMD from your tax-deferred accounts if you do not want to owe IRS a large penalty fee.

3. Consider a Roth IRA conversion.

One of the best ways to reduce your taxes in retirement is to convert some of your traditional 401(k) or IRA into Roth IRA money.

A Roth IRA conversation is a process of switching between retirement accounts.

You take money from a 401(k) tax-deferred account and roll it into Roth IRA. The Roth account is funded with after-tax money, so when you go with the conversion it will trigger the tax bill.

But you will pay taxes only on the converted money. Once you make the move, all the funds in the Roth account will grow tax-free.

The best part is that you are not required to take a minimum distribution on the Roth IRA money, so it will grow and accumulate longer.

So, the important thing to remember is that money in a Roth IRA account grows tax-free and can be withdrawn tax-free.

However, you will need to pay taxes on any amount converted from 401(k) or IRA to a Roth account.

Even though you must take money out and pay taxes on tax-deferred accounts, your Roth IRA money will stay intact, grow, and accumulate with years. It could be used as an emergency fund or passed on to your heirs.

As a financial goal, I plan to move 50 percent of all our tax-deferred accounts to a Roth IRA account before we turn 72. I am planning to do it gradually so it will help control RMD withdrawals and reduce our taxes in retirement. Besides, if we want to delay the start of our Social Security, we will have several years of low income, which can be a good time to complete the Roth IRA conversion.

4. Withdraw from accounts in the right order – taxable vs. tax-deferred.

The saying “it is not what you earn, but what you keep” is true when it comes to withdrawing money from your various accounts.

In retirement, we need to be smart about taking money out of our retirement funds, otherwise, the big chunk of it might be eaten by taxes.

Here is a helpful article from Fidelity Investments you might want to read:

Tax-Savvy Withdrawals in Retirement

As a general rule, it is better to sell investments held in taxable (investment) accounts first instead of taking money out of tax-deferred accounts.

The main reason is that the withdrawals from the traditional 401(k) and IRA accounts are taxed as ordinary income. And typically, ordinary income is taxed at a higher rate than the long-term capital gains from the taxable (investment) accounts.

On another hand, if you withdraw money from your taxable accounts before tax-deferred, it might increase an RMD rate and that reduces your tax efficiency.

This is one of the best ways to withdraw money for tax efficiency:

First – pull money from your taxable (investment) accounts
Second – withdraw money from your tax-deferred accounts – IRA and 401(k)
Lastly – take money out of tax-free accounts – Roth IRA

5. Figure out how to take distributions from multiple accounts.

Over their lifetime, many people accumulated multiple retirement accounts – traditional 401(k)s, IRAs, and Roth IRAs. Before an RMD rule kicks in, you need to figure out how much and in what order to withdraw money from all these retirement accounts.

The problem is you cannot tap into all your retirement accounts at once.

For example, if you own a few traditional 401(k) accounts you have to withdraw from each of them individually. The same rules apply to IRA and Roth IRA accounts. That means that you cannot make withdrawals from an IRA account to meet your RMD requirements for a 401(k) account.

On another hand, you cannot combine all these accounts into a single account so it will be easier to control your money and withdrawals.

The best way is to consolidate your multiple IRAs into a single account.

However, you cannot combine 401(k) and IRA accounts into a single account, but you can roll over 401(k) into IRA.

If you are still working and have several 401(k) accounts from your previous jobs, you should be able to merge the old 401(k) into your current employer’s 401(k) plan. However, if you cannot combine old and new 401(k) plans, you can rollover old 401(k) accounts into an IRA account.

I am still a few years away from the RMD rules, but I have already begun thinking about merging all our retirement accounts into a single account.

Roman and I have multiple retirement accounts with different financial institutions:

(2) 401(k) accounts, (1) Roth 401(k), (3) Traditional IRAs, and (2) Roth IRAs.

Personally, I feel that calculating and taking money out for multiple RMDs sounds very complicated. That is why I am planning to consolidate all accounts under one roof with 401(k) and IRA rollovers which can make my life much easier to manage RMDs and to keep track of our investments and taxes.

Final Thoughts

There is so much information on how to save and invest for retirement. But when it comes to the withdrawal strategy things start looking complicated. There are many strategies, ideas, and rules to remember when you start planning for retirement.

With the knowledge of how to withdraw from retirement savings, you can minimize your taxes and keep your retirement funds working for you longer.

However, it is a complicated matter, and finding an account or a financial advisor who will help you navigate everything will be the best decision.

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