Money Management

How to Use Home Equity in Retirement

coins - potato - home equity in retirement

Do you know what is home equity and how to use it in retirement?

For most of us, our home is more than four walls and a roof. We spend so much time there that no wonder there is a strong emotional connection between you and your home.

That is why it is hard to think about your home as a financial asset. But depending on how much home equity you have built over the years your home might be one of your most useful retirement assets.

For people like me who are close to retirement, the question appears more often than ever whether to sell or keep the family home.

I would love to remain in our house full of memories where we raised our daughter, celebrated holidays with friends, and lived the big portion of our life. The separation would be hard. But besides the emotions, the decision to stay or move could mean financial risk or financial security in retirement.

According to the Federal Reserve Bank of New York, the average 65-year-old has 47 percent more debt today than a 65-year-old had in 2003. And based on recent studies, only 1 in 3 retirees are confident that they have enough money saved for a comfortable retirement.

I read several articles pointing at the gloomy picture of today’s workers to be at risk of having insufficient retirement funds. Outside of 401(k) and IRA plans, Americans saved very little for retirement.

However, there is one bright spot in this picture – home equity.

What is home equity?

Home equity is a portion of your property that you ‘own’.

When you purchased your home, you probably paid only 10 or 20 percent as a down payment and borrowed the rest of the money from the bank. Even you are considered a homeowner, but the bank owns the portion of your home until you pay off the loan.

How home equity works.

Home equity is the market value of your house minus what you owe. For example, the current market value of your house is $550,000, and you have a remaining mortgage of $250,000. Thus, your current home equity is $300,000. This amount of equity in your home belongs to you.

$550,000 – $250,000 = $300,000

During a healthy real estate market, when the prices are rising, your home goes significantly higher in value. So, you will build equity without any efforts on your part.

I always check the market value of our home on a website like Zillow. It helps to see how it appreciated over the years. So, if your home value has grown from $550,000 to $600,000, you will get more equity in your home.

$600,000 – $250,000 = $350,000

You can increase home equity by paying down your mortgage and/ or taking steps to increase market value through home improvement projects. If you like to watch home remodeling shows on the HGTV channel, you can learn the ways to improve the value of your home. However, any of these projects will require extra money to pay for the improvement.

Even though we live in our homes, home equity is considered a financial asset. There are several ways to put that asset to work If you decide to use your home equity.

Here is how to use your home equity in retirement:

Downsize, buy a smaller house or condo, and invest your remaining funds.

small house on mountains - home equity in retirement

We are emotionally connected to our home. Owning a home is like ‘being in a long-term relationship’. But homeownership comes with huge financial responsibilities.

If you are approaching retirement and do not have enough money saved, downsizing will be the easiest way to get access to extra money through your home equity.

After selling your home, you will receive home equity from the sale proceeds. Although, you will not be able to get all the money from your buyer if you still have a mortgage. When you sell a house with a current mortgage, the buyer’s fund will pay off to a lender whatever is remaining on your loan. In addition to that, you will have to pay realtor fees, taxes and spend some money on moving out.

For people who decide to downsize, the capital gain tax exemptions of $500,000 for a married couple and of $250,000 for a single person still works. However, there are certain rules if you want to qualify. Your house should be your primary residence, and you have to live there for two of the five years before the sale.

The important step is to decide how to use the money released from the sale of your home. You can use some of your equity to buy a smaller house or condo.

Moving from a home valued at $500,000 to one that costs $250,000 should give you extra cash. Then you can use the remaining $250,000 ($500,000 – $250,000) to increase your retirement savings or invest them into the stock market to receive an additional income.

Eventually, downsizing should help to save more money and give more financial freedom in your golden years.

Moving from a sprawling 3,500 square feet family home to a 1,000 square feet condo will help to reduce the cost of living. Housing cost is one of the highest retirement expenses. That is why most people choose to downsize because they want to reduce their monthly expenses while living on a fixed retirement income.

Just remember that if you do not have enough money saved for retirement, downsizing will help you to get extra cash to fund your retirement years. But be careful when thinking about how to put to work extra money released from the sale of your home.

Eventually, you will need to choose between 3 options if you decide on downsizing:

Relocate or stay in your town?
Rent or buy?
A single-family home or condo?

Any option you choose, downsizing will help to free up money you can use to improve your retirement lifestyle for years.

Sell your home and move somewhere more affordable.

Another way to use your home equity is to sell your home and relocate to a more affordable place.

Where do you want to live when you retire? Are you living in a home that you cannot afford?

Relocating to a place with a lower cost of living will help to reduce your monthly expenses and stretch your retirement savings. In addition to that, if you live in an expensive town, you can sell your home, buy a much nicer house in a cheaper area, and still have a big chunk of cash to live off.

Sell your home, move out, and live on rent.

Most people prefer to live in their own homes because of feeling safe and independent. There is a long list of pros and cons to both renting and buying. However, there are still many reasons for renting when you retire.

One of the main reasons for you might be to increase your retirement funds. So, if you decide to sell your home and live on rent instead of buying a new condo, you can stretch your retirement savings for longer.

When you are older and an empty nester, you do not need to live in that big house. You need less space, and you want somebody to take care of it. In addition to that, renting instead of buying a new home can significantly increase your retirement savings.

After the sale of your home, you will end up with an extra pot of money that can be invested for an additional income or spent to enhance your lifestyle.

Sell your home and move abroad.

mountains-lake-flamingo - move abroad in retirement

Are you looking forward to setting up a home somewhere new? Life in retirement should be full of new adventures.

Retiring outside of the US is becoming a popular option among many baby boomers. When choosing a retirement destination, it is important to choose a country where the cost of living is low enough so you can stretch your retirement savings.

One of the most important factors to decide is how affordable your new place to live for years.

It is hard to imagine that many baby boomers can afford to retire in Italy or France. These countries are rich in culture, art, history, and food, but they are not cheap.

However, countries like Ecuador, Mexico, Costa Rica, or Panama can offer American retirees’ low cost of living, reliable healthcare, and decent public transportation system.

Moving abroad is not for everyone. But if you are looking for adventure in your golden years, you can live a more pleasant and comfortable lifestyle at half of the cost than retiring in the US.

Stay in your home and take out a reverse mortgage to fund retirement.

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, a home-ownership might provide several options to fund your retirement without the risk of stock market investments.

One of the options is a reverse mortgage.

‘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.

Article: Your Guide to Reverse Mortgages

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 to move out. But the loan has to be repaid when the owner leaves the house. A reverse mortgage can be flexible, and you can take HECM as a line of credit (HELOC), lump sum, or an 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.

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.

Article: Retirees Should Consider Reverse Mortgages

Putting It All Together

Over the years, your home was providing a safe haven for living your life. But it also has become your largest financial asset that increased in value.

If you are getting closer to retirement, you need to plan how to maximize every asset you have. Since the fear of running out of money in retirement is still present among many retirees. Your home can give you a huge financial advantage, especially, if you have built up significant home equity.

When you retire, that money can be converted into retirement income, cash for everyday expenses and hobbies, or financial leverage for long-term care. Explore the ways you might want to use your home equity in retirement.

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Disclosure: This information is only educational. This post intends to provide a simple guideline for an extremely complicated matter. I am not providing any specific financial advice or recommendations to any of my readers.

Are You Financially Prepared to Retire?

by Maggie 4 Comments

middle age couple - financially ready to retire

You are getting close to your retirement age. But do you know if you are financially prepared to retire?

Retirement is a big step and it will be hard to reverse a decision. Not everybody wants to retire. Many people who are old enough are not ready to retire. But according to the surveys, there are a significant number of people who feel they retired too early and were not fully prepared for that step.

Most people dream of having a great time when they stop working. They dream about having a nice place to live, exciting travels, and leisure time spent with a family. But it all costs money. Not to mention ordinary bills for food, transportation, utilities, medical insurance, and taxes that must be paid every month. It is hard to do things or even live comfortably if you do not have enough money saved for retirement.

Following this checklist should help you being financially prepared for retirement:

Get a clear picture of your retirement lifestyle.

What do you want to do when you retire?

It is important to have a clear picture of how you want to spend your time in retirement. Ask yourself:

Do I like to travel? If you are like me and dream about traveling in retirement, you need to know where and how much it will cost.

Do I have a list of activities or hobbies I want to start? Does it require you to buy new equipment or to have an additional space? Will I need internet and cable in my day-to-day life?

How are you planning to fill in your days?

There are a few questions to ask yourself:

Do I want to spend more time with my grandchildren?

Do I want to volunteer for a local organization or take a part-time job?

Do I want to join a club or start attending classes at a local college?

What is my passion? Cooking? Gardening? Maybe I will cook homemade meals and invite friends instead of eating out.

Where do you want to live when you retire?

Are you planning to retire in place or relocate? If you want to relocate have you made a list of your priorities:

Retirement community?
Proximity to the beach? Or near the mountains?
A small town? Or a big city?
Close to children and grandchildren?
Medical facilities?

Have you researched places you want to relocate? Or have you visited these places? Do you know how much will it cost to relocate? Housing will be the most expensive category of your retirement budget.

If you want to retire in place, ask yourself:

Will my home be paid off? Or will I have a mortgage to carry into retirement?
Do I want to have a few small projects upgrading my home? Or one big home renovation?
Is downsizing an option? Is it time to consider something smaller and easier to maintain?

Calculate financial needs to support your retirement lifestyle.

The first step to being financially prepared for retirement is to determine how much money you need to afford your dream lifestyle. Once you have a picture of your retirement lifestyle you can get a sense of how much money you need each month to pay for this life. The number should include your daily living expenses and the money you want to spend on hobbies and activities.

You should have enough saved to live on 80 percent of your annual pre-retirement income. This number is a good rule of thumb if you do not plan on making any major budget changes when retire. However, not all retirees spend less in retirement.

The best advice is to create an estimated retirement budget based on your current and future expenses. You might have a general idea of what you spend now. But you will be better prepared financially for retirement if you have a clear picture of your expenses now and how that might change in the future.

When you retire you do not need a lot of things that you did when you were working. The costs of commute, take-out lunches, and business clothes will go down. But you will start spending more money on travel, hobbies, and activities. And maybe your medical expenses will increase with time.

It is important to include big-ticket expenses into retirement budget as well. Sending a grandchild to a college or paying for a wedding. Buying a new car or a lake house with a boat will require a significant amount of money withdrawn from your retirement funds.

Get a clear picture of your retirement income.

When you are working you probably have a single employer and a single source of income – your salary. In retirement, everyone has different sources of income.

As a retiree, you receive income from multiple sources:

There are several sources of guaranteed income:

Social Security
Pension
Annuity – a guaranteed income you must purchase yourself

Other sources of income:

Part-time job
Rental income
Business
Dividends

Sources of income from your investments and savings (your nest egg):

Tax-deferred accounts – 401(k), IRA
Tax-free – Roth IRA, Roth 401(k)
Taxable investment accounts
Taxable bank checking and savings accounts

While working, you receive a paycheck regularly – probably every two weeks. When you retire, you might receive income monthly, quarterly, annually, and even irregularly. Getting a clear picture of your retirement income should help to make sure that you have enough money to cover all your living expenses.

Develop your withdrawal strategy.

Do you know how much income you can pull from your nest egg?

If you want to be financially ready for retirement you need to have an income plan or your withdrawal strategy. An income plan is a strategy for withdrawing money from your retirement accounts.

A good starting point for many retirees will be a well-known rule of thumb – the “4% rule”. The 4% retirement rule refers to your withdrawal rate. If you have a well-balanced retirement portfolio (60% stocks and 40% bonds), you can withdraw 4% of your account balance.

For example, if you have $500,000 saved in retirement funds you can withdraw 4% of that amount – $20,000 in the first year of your retirement. You can adjust that number every year for inflation but following this rule should help not to run out of money for at least 30 years.

Though, you have to be aware that this rule of thumb is not perfect. When I have researched the “4% rule” it has shown all kinds of pros and cons.

There are a few problems associated with following this rule:

Return risk – the risk of earning lower returns than it was in the past.
Longevity risk – the risk of living a long time and running out of money at the end of your life.
Series of return risks – the risk of a market downturn during your early withdrawal phase.

Even it is not perfect, the 4% rule is a good starting point you can adjust with time.

Pay off debt.

Paying off debt, no matter how much you owe, is a key to a stress-free retirement. Getting into retirement with any kind of debt will put a burden on your lifestyle. I am sure you will be irritated knowing that you need to make a credit card payment every month with your retirement savings. The best advice is to pay off all your debts before you retire including a mortgage.

Your mortgage payment will be the largest and most consistent expense in retirement. When you live on a fixed income you need to have a plan on how to handle these payments.

Check how many more years of payments you have on your loan and try to pay it off before you stop working. Maybe you can use some savings to pay off the home loan. However, if you cannot pay it off in full, consider downsizing and selling your home.

Some retirees have enough money saved to afford mortgage payments and to enjoy their life in full. But if you have limited retirement funds you will be better off without a burden of a home loan.

While paying off debt including a home loan might not be realistic for everyone, the less debt you have the better you prepared financially for retirement.

Determine how to cover medical expenses.

You will become eligible for Medicare at the age of 65. If you plan to retire before age 65 you will need to find a separate plan to cover your medical expenses.

When you stop working, your health insurance provided by your employer ends. Even if your current employer promise to cover your health insurance in retirement does not mean they will not change their mind in the future or reduce coverage significantly.

Thus, you will need to find and buy your health insurance coverage. 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 does not cover premiums, deductibles, co-pays for doctor visits, dental and vision care, long term care, personal care, and other expenses. This means you need to include healthcare costs in your retirement budget.

Article from Retire Guide: Health Savings Account as an Investment Strategy

Remember about tax strategies.

In retirement, we still need to pay taxes, but not all sources of income are taxed the same. Withdrawals from tax-deferred accounts such as 401(k) plans and traditional IRAs will be taxed as an ordinary income.

Withdrawals from Roth IRAs and Roth 401(k) plans will be tax-free. If you want to withdraw money from taxable investment accounts, you will have to pay capital gains taxes.

In addition to taxes, you need to remember about required minimum distributions (RMD). You will face this requirement when you reach the age of 72. By the US tax law, you are required to start taking withdrawals from your retirement accounts such as 401(k) and IRA (excluding Roth IRAs). The amount you must withdraw will be determined by the IRS. If you have more than one retirement account, you can withdraw money from each account or total RMD from just one account.

For example, you have several IRA accounts. First, you need to calculate the RMD for each IRA separately each year. Next, you can sum up your RMD amounts for all your IRAs and then withdraw the total from one IRA. You do not have to take a separate RMD from each IRA account.

It is important to remember that your RMD withdrawals might push you into a higher tax bracket.

Think about what tax strategies will work for you the best. If it makes more sense you can roll your assets into Roth IRA before you reach RMD age. Another option is to start taking withdrawals from your retirement accounts before RMD kicks in so you would not face the sudden jump in taxes.

Putting It All Together

Getting closer to retirement can be both exciting and stressful. But if you want to have a happy and comfortable retirement you need to take time to understand your retirement picture.

You do not want to be one of those people who want to retire, but when that day finally arrives, they just let it happen. You want to be smart and invest time in planning and preparing for a big day. Before you take the plunge make sure that you are financially ready!

If you do it right it might be the best time of your life!

Are you financially ready to retire? Please share your thoughts in the comments below.

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Disclosure: This information is only educational. The intent if this post is to provide a simple guideline for an extremely complicated matter. I am not providing any specific financial advice or recommendations to any of my readers.

6 Costly Retirement Mistakes to Avoid

by Maggie Leave a Comment

old woman on the bench - retirement mistakes to avoid

How often do you check to see if you are on track to retirement? I know this can feel like an overwhelming task. But if you are in your 50s or 60s checking on your readiness for retirement is a must.

Retirement is a major life event. When you finally retire you need time to process and adjust to your new life. You want to make sure you are making smart decisions about your future. Many new retirees do not know how to control their spending. They got excited about retirement and dream about new ways to spend their saved money.

Some people will spend money on a beautiful vacation house or remodeling the current one. Others will buy a luxury car or a boat. Many like me who will spend money on traveling the world.

But it is important to remember that once we retire, we have to live on the fixed income. And spending money fast will put us on a dangerous path to a financial disaster when we are old and cannot work anymore.

Here is the list of 6 costly retirement mistakes to avoid.

I have included some tips on what to do when you are facing any of these challenges.

Mistake #1 – you live in an expensive area.

city view - living in expensive area in retirement

Housing is expensive. Everybody knows that living in a big house is costly. It takes a big chunk of your income to pay for property taxes, homeowner insurance, utilities, maintenance, and mortgage.

Generally, you want to spend no more than 30 percent of your monthly income on housing. But if you live in an expensive neighborhood it may take between 35 to 50 percent of your income to pay for it.

Most of us hope that we will spend less money in retirement. While we will save money on business clothes, commuting expenses, and takeout lunches, we will still have to pay for housing expenses.

When you retire, housing will be your biggest expense. It may eat up a good chunk of your retirement income. You need to make sure that you can afford it while living on a fixed income.

What to do:

To avoid this costly retirement mistake you need to downsize or move to a more affordable area. I am sure the home where you live now is a perfect size and location. I know that you love it and have a lot of great memories of raising your family there.

But if it is in a high cost of living neighborhood and expensive to maintain you need to downsize and move to a place where you can afford it. Otherwise, you will run out of money fast.

Mistake #2 – you have too much debt.

Retiring with too much debt is a way to deplete your retirement savings fast. If you do not plan for reducing it now, you will face the challenge of not having enough money to pay for your retirement expenses.

Paying off the debt on a fixed retirement income can be a big burden. It will be difficult to live comfortably if you have to pay large debt balances. There are several sources of debt we tend to accumulate during our lives:

Mortgage
Credit card
Student loan
Car loan
Home renovations loan
Medical expenses

It is not a secret that baby boomers generation has more debt than previous generations. According to Experian data for the fourth quarter of 2018, people between the ages of 55 and 73 carry an average total debt of $95,095.

If you want to enjoy a debt-free retirement, you need to reduce or pay off as much of your debt as possible.

What can you do:

The best approach to deal with debt is to start with small steps. You need to develop a plan on how to pay off your debt and then stick to it.

Over the years Roman and I had accumulated $95,000 in student loans, $120,000 in home renovation loans, and $5,400 in the medical loan. It took us many years to pay them off. In the beginning, we did not create a plan of paying off debt fast. Then, we got serious, created a plan, and diligently followed it for several years. I am happy to say that we finished paying off the home renovation and student loans by the end of 2019.

I have to admit that being a personal finance blogger help me to speed up the process of paying off our debt. Our next plan is to pay off the mortgage before we retire. Paying off debt was an important decision because it helped us to increase our retirement savings.

Mistake #3 – you did not prepare your retirement budget.

When you dream about retirement while still working you might miscalculate the cost of your retirement. Accurately predicting the future can be challenging. However, preparing a retirement budget in advance will help to see your financial situation. Also, it will help to see if you can afford the retirement of your dream and figure out when you are ready to retire.

You need to take time and create a retirement budget that compares your spending to your combined income. Also, it needs to be done before you retire so you know if you can afford it.

First, you need to know how much you will be receiving from Social Security, pension (if you are the lucky one), your savings, and part-time work. Next, you need to estimate your future expenses and compare it with your retirement income. Once you compare it, you will get an idea of how long you can sustain the retirement of your dreams.

Retiring without a budget is a mistake and can cost you greatly. Perhaps you are the lucky one who has enough money to retire in your home, maintain your current lifestyle, and pay for wonderful trips, vacations, and hobbies. But most of the future retirees will need to adjust to make their money last. Some of these adjustments might involve:

Downsizing and moving to a more affordable community.
Relocating to a different state with a low cost of living.
Delaying retirement and working longer.
Working a part-time job in retirement.

How to avoid this retirement mistake:

I talked about how to prepare a retirement budget in the post below. It should give you a clear step-by-step guide on how to do it.

Mistake #4 – you started to claim Social Security benefits too early.

Social Security paycheck is a guaranteed retirement income. The best part of Social Security that it will keep coming in as long as you live. The smart way is to make your Social Security paycheck as large as possible because it might be the only guaranteed lifetime income you will receive.

You can start taking your Social Security benefits at 62. But you will not be receiving the full payment. It will be reduced to up to 30 percent and this reduction will be permanent.

We all know that life is full of surprises. Sometimes people have no choice but have to start claiming Social Security early. If you lost your job and have no money or get ill and cannot work, you might need that paycheck to survive. But if you can afford not to take it, you will be better off in the long run.

What can you do:

If you have not started your Social Security, the smart way is to wait to claim your benefits. Waiting until a full retirement age which is 66 or 67 for many of us will help to have access to 100 percent of your benefits.

If you can afford to delay it even longer until you turn 70, will help to get the highest Social Security paycheck for the rest of your life. When you’re in your 80s or 90s, the monthly difference in your income from delaying might bring a big difference between living in poverty or comfort.

Mistake #5 – you did not save money for medical expenses and long-term care costs.

Many baby boomers who are close to retirement still believe in free Medicare. I assume people do not do enough research to understand that Medicare does not cover all your medical expenses. Therefore, being hit by a major medical bill while living on a fixed income can be damaging to your retirement funds.

It is important to remember that healthcare is the second biggest expense in retirement after housing and you need to plan for it.

The healthcare cost is rising. According to recent data from Fidelity, the average out of pocket healthcare cost for a 65-year-old couple will be close to $285,000 instead of $265,000 as it was two years ago. And that number does not even include long-term care costs.

What can you do:

There are several ways to avoid this costly retirement mistakes. First, you need to plan for it and save more money. You can set up a health savings account (HSA) and start contributing money regularly. It is a tax-deductible account which helps to reduce your taxable income. With withdrawals from HSA, you can pay for qualified medical expenses, including dental and vision.

Article from Retire Guide: Health Savings Account (HSA)

Next, you need to decide how to pay for long-term care if you or your partner need it. Long-term care insurance is the most recommended way of planning for future expenses. It will help you not to be a financial burden on your family if that time comes.

Then, think about how to take care of your health so you can live a long and healthy life in retirement. What you eat today and how often you exercise will impact who you are in 10 or 20 years. Being active and eating right can add more years to your life and save money on future medical bills.

Lastly, do not forget to get regular check-ups, screenings and to visit your doctor, so that if any problems get caught early you can do something about them.

Article by Danielle K. Roberts: Healthcare Costs in Retirement – Avoid These Big Mistakes

Mistake #6 – you spend retirement money fast.

kitchen remodeled - costly retirement mistakes

Many new retirees tend to spend their retirement savings fast. They get excited about newfound freedom and having a good chunk of money saved for their next phase of life. Then they think about big remodeling projects or even buying a vacation house on a lake and a new boat.

Many new retirees take up new hobbies and activities to fill up their new free found time which can add up a lot of extra expenses to their retirement budget. Also, you might want to travel more and like to spend money on long-term travel or family vacation trips. And the list of new things you want to do is long.

According to data, more than 20 percent of retirees spend more on leisure than they thought they would. Finding new ways to spend your retirement money can be a costly mistake if you do not know how to control your spending.

What to do:

Stick with your retirement budget and control your spending. You do not want quickly to blow through your savings like there is no tomorrow. You still want to have fun in retirement, but you have to be careful with overspending. The bucket strategy will help you to stick to your budget and provide income for those fun years.

You have to figure out how much to withdraw from your retirement savings. Deciding how much to withdraw can be confusing. You do not want to withdraw too much too soon because it is going to leave you financially broke in your late years. On another hand, you do not want to withdraw too little and then struggle financially.

How much should you withdraw from retirement accounts?

As a new retiree, you need to make your own assessment of how much is safe to withdraw from your retirement funds. The financial experts recommend following the 4 percent rule. The 4 percent rule is a rule of thumb for retirement spending. It will allow you to withdraw 4 percent of your portfolio each year for a comfortable retirement.

Putting It All Together

Many things that can go wrong in your retirement. Besides, some things that can happen beyond your control such as health issues. But there are costly mistakes we need to avoid because they can ruin even the most carefully planned retirement.

Have you thought about retirement mistakes? How are you planning to avoid them? Share your thoughts with us in the comments below.

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What Boomer Women Need to Know About Retirement Planning

by Maggie Leave a Comment

Women-walking on the road-baby boomer women and retirement

If you are a baby boomer woman, you have probably spent most of your adult life rushing around and trying to do everything. You try to be a wife and a mother. You try to build a career, take care of your family, and pay the bills on time. Some days it feels like we do not have a life because we have to take care of so many things.

For many women in their 50s and 60s, it was normal to stop working when you started a family and had kids. Many women stayed home for years or worked part-time to help make ends meet. Because they put their family first their career opportunities were limited and resulted in lower wages, limited savings, and smaller Social Security benefits.

I have read many articles discussing why baby boomer’s generation is way behind on saving for retirement and how to help them. Baby boomer women often described as farther behind on retirement planning goals than men.

As women, we tend to let investing, financial and retirement planning responsibility fall on the men in our lives. Traditionally it has been the husband who took care of investments and financial planning, while the wife took care of the family.

“Among women aged 65 and up, the poverty rate remains nearly double that of men in the same age group. And, even though they will statistically live longer than men, many women are less likely to have planned or saved enough for retirement.” From Kiplinger, by Linda Gardner

Article from Kiplinger: Baby Boomer Women Have a Big Retirement Problem

Here are several reasons why baby boomer women need to have their own money in retirement:

Women live longer than men.

On average, we live 5 years longer than men. If we do not have enough savings to cover these years many of us will be at high risk of living in poverty in old age. Another sad truth about old age is that these years are not usually cheap or healthy. This means if we live longer than our men, we need to have more retirement resources than they have.

The truth is many women will likely take the sole responsibility of their finances at some point in their lives. Some women will remain single, but others will be divorced or widowed. If statistics show that we will outlive our husbands, it means that many of us could lose some of our husband’s pension or their Social Security benefits.

Another truth is if we will live longer there is a high chance that the financial burden of caring for our elderly parents or in-laws will fall on our shoulders.

Women earn less money than men.

Women still typically earn 25 percent less than men. The good news for women that we live in a new age where the barriers holding us back for so long seem to be declining. And yet there are still many obstacles to overcome.

Many baby boomer women did not have a steady career. Most of their lives they worked part-time or for small firms and non-profits. In many cases, it means they did not have access to an employer-sponsored retirement plan like 401(k) and they did not save enough money for retirement.

Women take time off to raise a family.

Many baby boomer women took time off to raise kids. Some of us still need to take time off to care for aging parents or a family member. It made harder for us to save as much as men. Unfortunately, a common mistake among boomer women is not to give retirement savings a high enough importance. We care for our families before we take care of ourselves.

If you are in your 50’s or 60’s and have not taken retirement planning seriously there is still time to change it.

Many women in their 50’s and 60’s feel that managing finances are not for them or men could be more qualified to handle their finances. After all, we carry so many responsibilities on our shoulders that there is no time to manage finances.

I am with you. I am making the same excuses and wish life would be easier. However, we cannot just sit here and wait for a happy retirement without taking certain steps.

How to save and invest for retirement for baby boomer women:

Get a clear picture of your financial situation.

woman writing on paper-retirement planning for baby boomer women

Start by creating a personal balance sheet. The first step is to get organized and get your financial numbers on a sheet. If your husband already has these numbers, ask him to share details with you. And if he does not have all financial information on one sheet you should prepare it together.

You do not need to go fancy and use a digital spreadsheet if you do not feel comfortable. Use old-school paper and pencil and start with ballpark numbers.

First, you want to see what you have – what do you own and what do you owe.

What are your assets?

The current value of your home
The current value of your cars (a boat?)
Value of your vacation home or rental property (if you have one)
How much money do you have in retirement accounts including 401(k), IRA, Roth IRA?
How much money do you have in a bank savings account?

What are your liabilities or debt?

Your mortgage balances
Car loan
Student Loan
Credit card debt
Other loans

Create a budget and incorporate your savings goals.

Second, if you do not have a budget, you need to create one now. Budgeting will create a framework for your finances. Thus, it will help you understand where your money is going each month. If you do not know how you spend your money there is not any leftover to save.

The main goal of creating a budget is to incorporate your savings goals.

After creating your personal balance sheet, you will get an idea of how much you have saved for retirement. If it is not enough there is still time to save more.

In our family my husband Roman takes care of budgeting, paying bills, and day-to-day money management. And I take care of retirement accounts and investment account portfolio. Every 3 months we get together and discuss our budget and our savings goals. We both like to use Excel spreadsheets for money management purpose. But for our meetings we put all numbers on the paper, so we can both see our progress.

Prepare a retirement budget and see if you have enough retirement income.

After you set up a budget it will be easier to start working on your retirement budget. The main goal of preparing a retirement budget is to see how to cover your retirement expenses while living on a fixed income.

On average you can live on 70 to 80 percent of your current income in retirement. Preparing a retirement budget will help to see if you have enough money to retire. If you are still working you have time to add to your savings, pay off debt, and change your spending habits.

Save more money.

If you are in your 50s or 60s and still working, it is not too late to save more for retirement. Part of the solution is simple – start saving more by spending less and putting extra cash into retirement accounts.

Start with employer-sponsored plan 401(k).

How much do you contribute to your 401(k) plan?
Are you making a catch-up contribution to your retirement account?

I understand that the idea of contributing a portion of your gross pay to a retirement plan makes sense, but maybe not feasible for many women. I hear you. I struggle with it myself. But with every dollar I do not spend today and contribute extra to my 401(k) I make my retirement more financially secure. My goal is to save up to 20 percent of my income.

For 2020, the IRS allows us to save $19,500 a year to a 401(k). For people age 50 and over the IRS allows an additional $6,500 a year contribution. The total contribution limit is $26,000 a year. Also, you can contribute $6,000 a year to an IRA. Additionally, for age 50 and over you can contribute an extra $1,000 a year to an IRA. The total contribution limit is $7,000 a year to an IRA.

Here is a simple example of how to improve your retirement savings. Maxing-out your 401(k) with a catch-up contribution of $6,500 a year and earning a 6 percent average annual return, will help you to accumulate around $97,300 extra in 10 years.

Learn how to invest your savings.

Learning how to invest is important for women of all ages. I read that many baby boomer women are worried about the nut and bolts of investing and making perfect investment choices. However, many studies have shown that women are confident investors when they learn how to do it.

First, you have to decide how to invest within your retirement accounts, including 401(k), IRA, and Roth IRA. It is recommended to invest in the mixture of stocks, bonds, and cash associated with your retirement goals, age, and risk tolerance. A moderate portfolio should include 60 stocks and 40 bonds. If you do not feel confident to invest in individual stocks and bonds you may find it easier to invest in mutual funds.

Second, within your retirement portfolio money should be diversified more to reduce the risk. For stocks, it is recommended to spread your money between large, mid, and small size companies in addition to the international companies and real estate. With bonds, it is recommended to spread money between long-term, mid-term, and short-term US bonds and international bonds.

Talk to a financial advisor.

people siting at cafe tables - meeting with financial advisor

As a woman, you might take care of the family budget, but your husband always took care of finances and meeting with financial advisors. For years financial planning and investing were your husband’s sole responsibility that is why you never paid enough attention to it. But you need to change it now.

You need to schedule a meeting with your financial advisor and go there with your husband. You need to discuss retirement planning, investment strategies, Social Security strategies, and more. Ask about possible ways to withdraw money from your retirement accounts to minimize taxes and penalties.

You have to be actively engaged in retirement and financial planning meetings with your advisor. Otherwise, if your husband dies you may struggle to understand your financial situation.

Final Thoughts

Many baby boomers are looking forward to a happy and secure retirement. But the process of preparing for retirement is not the same for everyone. Baby boomer women may have some unique challenges on their way to retirement. That is why retirement planning can be quite different for them.

But the time has never been more right for us as women to take control of our finances. We do not want to put our heads in the sand anymore. We want to take our financial security in our hands even it will take time to learn the nuts and bolts of retirement planning.

Do you feel prepared for retirement? Do you have your own money saved for retirement?

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Disclosure: This information is only educational. I am not providing any specific financial advice or recommendations to any of my readers.

How to Prepare a Retirement Budget in 5 Simple Steps

by Maggie 4 Comments

two women with laptop at the table-retirement budget

There is a fear of running out of money in retirement among many baby boomers. As boomer women, we live longer than men, but our savings are not always enough to last long in retirement.

The main goal of retirement planning is to see how to cover your retirement expenses while living on a fixed income. Part of creating a solid retirement plan is to understand your retirement income and expenses. That means you need a retirement budget.

The best advice is to start planning when you are still working and can adjust the numbers. Preparing retirement budget will help to see if you have enough money to retire. If you are still working you have time to add to your savings, pay off debt and change your spending habits.

How do you prepare a retirement budget? I will take you through 5 simple steps.

Step 1. Calculate your retirement income

bees flying over lavender-preparing retirement budget

The more sources of retirement income you have the better off you will be in your golden years. The income in retirement will come from different sources. For many retirees, a Social Security paycheck will be the ONLY income. Other retirees will have an additional income coming from 401(k), IRA, Roth IRA, savings, annuities, dividends, and/or rental properties.

Start with Social Security and find out how much you will get paid once you retire at 62, at full retirement age which 66 or 67 for most of us or delay it until you turn 70.

Social Security website will help you to open an account if you do not have one and find out the size of your guaranteed paycheck.

Social Security website

The next source to consider is pension income. Most Americans do not have pensions anymore. But if you are lucky and have a pension add the estimated paycheck to your Social Security.

Then, look at your retirement accounts including 401(k), IRA and Roth IRA and calculate the balance on all of them.

After you calculated your retirement savings balance, find out how much it will grow in the next 5 or 10 years. For example, you have saved $200,000 on your retirement accounts. If this money grows at 6 percent per year, it will be worth $267,645 in 5 years or $358,170 in 10 years. I like to use an online calculator for estimating my investment portfolio growth:

Smart Asset investment calculator

Using a 4 percent safe withdrawal rule will help to see how much income you can generate from retirement accounts. It would generate around $10,405 or $14,326 a year of income.

Finally, calculate the total of your combined retirement income:

SSB + pension + retirement accounts + bank savings balance + rental income + business income = combined retirement income.

Step 2. Estimate your retirement expenses.

man using notepad and laptop-preparing retirement budget

Step 2 will help to find out how much money you need in retirement by accurately projecting your retirement expenses. It is easier to control your spending than retirement income. And we all know that if we spend less than our monthly income, our retirement funds will last longer.

A simple way to estimate your retirement expenses is to know where and how you spend your money today while still working.

Divide your expenses into 3 main categories:

Essential – need to have
Non-essential – want to have
Unexpected and/or one-time expenses

Label your expenses as either essential or non-essential. It will help to see where your money is going.

Essential expenses – need to have:

Your essential expenses are expenses you cannot live without in retirement:

Mortgage or rent
Utilities
Transportation
Food
Medical

When you retire, you will still have to spend money on these expenses each month. But how it will change in the future when you stop working?

Here are the same budget categories but the cost of it might change when you retire.

Housing – Are you planning to downsize, pay off your mortgage, rent, or relocate to a more affordable place? You have to include the property taxes and maintenance costs if you’re an owner.
Utilities – Cost of utilities might go up or down. If you relocate to a warmer state, include the additional cost of air conditioning.
Internet/ cable/ phone – Are you planning to spend a lot of time at home reading and gardening or some of your hobbies include using the internet? You should include the approximate cost of the internet and cable in your retirement budget. Many people cut costs by switching from cable TV to a streaming service.
Transportation – How your transportation needs will change in retirement? How many cars do you have? Are you planning to downsize your vehicles? Will you buy a new car or a boat? Calculate how much you pay each month for gas, car insurance, and parking and decide how it will change when you stop working.
Food – How much you will spend on food depends on your eating habits. Most retirees start eating out less and prefer to have homemade meals. This budget category expense can be significantly reduced.
Medical – It is hard to calculate medical out-of-pocket expenses, along with premiums for Medicare. Yes, Medicare provides health insurance, but it does not pay for all medical bills and it does not pay for long-term care at all. There is no way to know how much it will cost. But according to Fidelity Investments, a healthy couple can expect to spend on average, a total of $275,000 out of pocket on healthcare expenses in retirement. And a long-term care cost is not included in this number.

Non-essential expenses – want to have:

These expenses are your extras. Make sure to leave room for fun when calculating your future cost of living. You worked hard most of your life while saving and planning for retirement. Traveling, camping, attending a concert, or eating dinner with friends will be part of your fun years. You need to plan for that and include the cost of it into your retirement expenses.

Traveling/ vacations
Hobbies
Entertainment
Gift/ charity

Many of my friends who already retire admitted that every month of their retirement look different than the month before. Some months they spend a lot of time at home. Other months, they are on the road visiting friends and family or traveling abroad.

Unexpected and/or one-time expenses:

Urgent medical expenses
Unexpected car or home repairs
Home improvement
Wedding
Grandkid’s college tuition
Funeral

By including these expenses into your retirement budget, you will minimize the chance to be surprised by these events. You wanted to be sure that you have enough money to cover these expenses. One way to deal with unexpected is to have an emergency fund. Instead of panicking at every unexpected bill, you will have a small pot of money at hand and ready for use.

For our retirement expenses I like to use a worksheet from Vanguard:

Vanguard retirement expenses worksheet.

Step 3. Compare your retirement income and expenses.

architecture - retirement income and expenses

After calculating retirement expenses compare it with your retirement income and see how much you have left over.

Retirement income – retirement expenses = cash flow

Once you stop working you can rely only on the income generated from your savings and Social Security. And if you do not have enough retirement savings, you will have to rely only on one source of income – Social Security. Even Social Security is considered a guaranteed income, but it might be not enough to cover all your expenses.

It is important to have enough income to pay for your monthly essentials. Thus, first look at your Social Security benefits and see how much it will cover. Next, calculate how much money you have to withdraw from retirement savings to cover other expenses.

You can boost your retirement income by downsizing your home or delay retirement for a few years. But those may be not the options for everybody. Most baby boomers will need to reduce their expenses and change spending habits so they can live on their available income.

I calculated that Roman and I will need to have $60,000 a year ($5,000 a month) to cover our expenses for the first 5 years of our retirement. We plan to downsize, sell our house and rent an apartment before we decide if we want to buy a condo. We like to travel and have a long bucket list of places we want to visit. If we do not delay our benefits until age 70, our estimated Social Security paycheck will be $42,000 a year ($3,500 a month).

Thus, we will need to withdraw an additional $18,000 a year ($1,500 a month) from our savings. Many advisors recommend withdrawing 4 percent from savings so your retirement funds last longer. We can withdraw up to $20,000 a year from our savings to follow this rule and feel safe.

If I want to bump that number to 5 percent and withdraw $25,000 a year from our savings, we will spend our retirement funds faster. I would rather adjust our lifestyle and reduce our expenses to fit a safe rule of 4 percent withdrawal than to deplete our funds fast. The goal is to adjust our lifestyle to fit our available income.

Even the whole process looks like a lot of work, remember that calculating these numbers now will make life in retirement much easier.

Step 4. Add inflation and taxes to your retirement budget.

Inflation is real and it will erode the value of today’s dollars over time. Many advisors suggest including 2 or 3 percent inflation to retirement budget. But if you are like me and have no intention of moving your retirement portfolio out of the market, you should expect that keeping money in the market will help to fight inflation.

When you start preparing a retirement budget first thing you want to know is how much income you have available to pay the bills each month. But whatever number you calculated in Step 1 may not be yours to keep in full. Your withdrawals from retirement accounts like 401(k) and IRA will be taxed year after year. And depending on your retirement income so might be a portion of your Social Security paycheck.

Hence, instead of being surprised by taxes, budget for them. Look at your current tax brackets and try to figure out yours in retirement based on estimated income. Then add that money to your retirement budget. You will pay lower taxes in retirement because you will have less income. But you still need to have money to pay taxes every year.

Step 5. Keep updating your retirement budget.

a woman on a suitcase-retirement expenses

I know that my retirement budget is not perfect and needs to be updated. But it is a starting point that allows me to learn how much income Roman and I need to replace when we stop working.

Budgeting for retirement is not a do-it-once-and-forget exercise. Retirement budgets are living things that need periodic checkups. Once you retire you need to keep updating your spending, income, and withdrawal numbers, because spending in retirement could go easy out of hands.

Also, you need to keep an eye on your retirement portfolio growth and make sure that all is going according to your plan. Otherwise, you need to adjust and fit your lifestyle to available income.

Final Thoughts

None of us wants to spend our fun years worrying about money. Everyone wants to enjoy retirement. Follow these 5 simple steps and start preparing your retirement budget. It should help you to stay on track financially so you can enjoy your fun years and avoid stress.

Do you have a retirement budget? Have you thought about preparing a retirement budget? Share your ideas with us in the comments below.

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