Retirement Planning

Tips for a Smooth Transition to Retirement

woman in purple dress with field flowers - smooth transition to retirement

Retirement is a major life transition. And all transitions come with adjustments.

Life changes after retirement. Everything work-related is gone. Everything we got used to is gone. There are no more schedules, early commutes, and daily routines.

Most of us imagine life in retirement to be like a delightful vacation – no alarm clock, no schedule, no deadlines, and no stress. Just sleeping in, having a morning coffee on a deck, reading a book, going for a long walk, or staying up late with a glass of wine. However, we need to realize that transitioning from a work-oriented lifestyle to retirement includes a big adjustment.

Unfortunately, a honeymoon period is often followed by a feeling of disappointment. Sooner or later, it might be a big contrast between expectation and reality. No wonder it will take time to find your own way to a new life in retirement, and you need to be prepared for that challenge.

I have created a list of helpful tips for a smooth transition to retirement. Try these tips to create a new life for yourself.

Prepare for ups and downs.

The first year of retirement will be filled with bumps and adjustments no matter how well you are prepared. Do not expect the transition from your 30 or more years of work to retirement to happen without stress and anxiety.

There are going to be surprises and disappointments down the road before you settle into something comfortable. There may be times when you feel lonely, isolated or a bit lost, which is normal.

Like many other life transitions, retirement comes with emotional and mental adjustments. Your transition to retirement will not happen overnight. Most retirees will go through stages of emotions when adjusting to a new life. Give yourself some time by understanding that this will be a process.

Do not spend your time dwelling on the thoughts about the end of your career, loss of identity, loss of social connections, and purpose in life. Accept that you have done all you can working for many years and focus on your next phase of life. Make peace with it and move on to your next challenge.

I recommend reading my post: 5 Common Emotional Stages of Retirement

Develop a routine.

We all need structure in life and our job helped create that structure for many years. When we stop working the structure is gone.

What happens when you retire? It is Monday morning, but you do not need to go anywhere. There is nothing planned. There is no alarm clock, no morning rush, and no early meetings or deadlines.

pastry and coffee mug on a table - transition to retirement

The first few days or weeks will be exciting. You can sleep late, read in bed, or catch on your favorite Netflix shows. But I am sure that by the end of the week or month you will start feeling bored, isolated, and maybe a bit depressed. The fun is gone, and you will be glad to go back to something more meaningful in your life.

That is why you need to develop a routine and create a “new normal”. Some people love to have a daily routine, while others cannot bear to have everything predictable. But without proper planning and developing daily activities to get you up every morning, your retirement life will be dull.

Set goals.

Setting up personal goals can be a powerful tool for finding purpose in life and helping you with the transition. Your retirement goals are maybe a little bit different than when you were working.

Your pre-retirement life was structured around achieving mostly professional and financial goals. After you retire, you still need to set goals for yourself to ensure you feel a sense of purpose and accomplishment.

Overall, goals give us a sense of direction. And with direction comes a sense of purpose. Make a list of your goals the same way you make a ‘to do’ list. Think about goals you want to achieve in six months or a year. Writing down your plans on a piece of paper will help you stay focused on a new life.

If you do not know how to create goals in retirement, I recommend reading my post: How to Create Retirement Lifestyle Goals

Find your path.

How you transition from the workplace to retirement will depend on many factors. It will depend on your financial situation, your health, and your vision of what retirement will be like. And you will set yourself for a smooth transition to retirement if you plan for that ahead of time.

fisherman on a beach - smooth transition to retirement

Think about whether you want to spend your free time doing something similar you did before retirement, or if you want to try something different. Write down a list of interests and activities that brings you joy even some of them you might put on the back burner for a while. Do not forget to include in your list new things you like to learn.

Discovering something new you have never done before can be a great way to step out of your comfort zone. Now that you have more time, there is a whole new world out there waiting to be discovered.

All those things we regret not having time to do during our working years can act as an inspiration when we transition to retirement. There are endless possibilities to explore once you have time and the freedom of retirement. It can be sports and travels, learning a new language or instrument, starting an art project, or home renovation.

If you want to learn more about what to do in retirement, I recommend reading my post: 15 Ideas What to Do When You Retire

Keep in touch with your friends from work.

Losing your network of co-workers and office friends can be hard. Eventually, life in the office will go on without you. Even though you are retired, it does not mean you have to lose contact with the group of your office friends completely.

A simple email, text message, or phone call can lead to regular catch-up meetings with your friends from work. Also, you can make arrangements for lunch or dinner dates once a month to stay in touch with your ex-colleagues. Most workplace friends will be happy to catch up with an old friend they have not seen for a while.

Once you retire, it is easy to become involved in other activities outside of the workplace. But keeping workplace friendships alive during retirement can help you mentally adjust to life without work.

Focus on your health and fitness.

We should all aim to stay fit and healthy to enjoy retirement. There are so many ways to be physically active by walking, gardening, exercising, swimming, hiking, etc. If you have not made exercise a normal part of your life while still working, retirement is a good time to develop this habit. Just going for a walk in a park or trail can do wonders for your mood.

Lately, practicing meditation as a strategy to relieve stress and anxiety has become more popular than ever. I do not know how often you should meditate, but some articles are suggesting that 10 to 20 minutes of meditation a day can be very beneficial for your well-being.

What you eat and how often you exercise will impact your health. Being active and eating healthy food can add more years to your life and save money on future medical bills. Make sure that you eat regular meals instead of snacking if it was your habit while at work.

an omelet and potatoes on plate - focus on eating healthy in retirement

Do not forget to go for a regular health check-up because prevention is better than cure. Regular visits to your doctor might help to prevent heart disease, stroke, diabetes, and some types of dementia.

Get your finances in order.

You will set yourself for a smooth transition to retirement if you get your finances in order before you retire. It will be easier to adjust to a new life without a regular paycheck if you know what you will have to live on.

Look at your current spending and figure out what you need in your new life and what you do not. You might learn that some of your expenses will decrease, but some will increase with time.

There is no need to spend money on business clothes, commute, take-out lunches, and other work-related things. But you will want to spend more money on travels, activities, and hobbies. Unfortunately, your medical expenses will increase with time.

I recommend creating a retirement budget that will help you see how much money you need for fun and entertainment and how much to cover your living expenses. You might discover you need to keep working longer or take a part-time job to cover your new lifestyle in retirement. Or you might learn you have enough money saved and can retire early.

Related Retirement Planning Articles:

Final Thoughts

Most of us look forward to retirement as a time to relax and enjoy our golden years. Finally, we can do whatever we want and when we want. But the transition from work life to retirement comes with its own challenges.

Many people will learn how to adjust to retirement life in different ways. Everyone’s path will be unique. But you will know how to deal with challenges if you are prepared. Following the tips above will help you adjust to retirement better so you can feel happy during your new phase of life.

Have you thought about transitioning to retirement? Do you feel prepared for your new phase of life? Share your thoughts in the comments below.

Like this article? Share it!

Everything to Know Before You Retire

by Maggie 2 Comments

Woman at computer - things to know before you retire

Retirement is a life-changing event. And like many things in life, preparing for retirement requires a lot of planning. 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.

Getting closer to retirement can be both exciting and stressful. You need to know if you are financially ready. And you need to understand how you will spend your days when you stop working.

Retiring without a plan can be disadvantageous. The better you are prepared and see what you are retiring to, the more successful you will be at this transition. Sometimes a step-by-step guide or “to do” list can help. I have created this post with all the things you need to know before you retire.

1. Know your financial situation and retirement needs.

The first step is to evaluate your finances. I read that new retirees have some financial anxiety related to the fact that they no longer earning a regular paycheck. The Baby Boomer generation is redefining what senior living and ‘retirement’ means.

The Boomers want more out of their retirement lifestyle – more activities, more wellness, and sometimes more of everything. But all these luxuries cost money. Not to mention ordinary bills for food, transportation, utilities, medical insurance, and taxes that must be paid every month.

Calculate what you need financially to support your retirement lifestyle.

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 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 your medical expenses will increase with time.

You might have a general idea of what you spend now. But you will be better prepared if you get a clear picture of your current cost of living and how that might change in the future.

The best advice is to create an estimated retirement budget based on your current and future expenses.

Related Posts:

Get a clear picture of your retirement income.

money bills & calculator - know your financial situation

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: Social Security, pension, part-time job, or rentals.

Another source of income will come from your nest egg – investments and retirement savings:

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

You need your nest egg to last through the next 20 or 30 years. Therefore, it is recommended to withdraw a safe 4 percent from your retirement portfolio.

For example, if you have $500,000 in your retirement funds, you can spend roughly $20,000 ($500,000 x 0.04) per year when you retire. Add this number to your Social Security, and calculate if it is enough to cover all your retirement expenses.

According to the stats, the average Social Security benefit in 2020 was about $ 1,514 a month, or about $18,170 a year.

To calculate the retirement income based on the numbers above:

$20,000 + $18,170 = $38,170 a year or $3,180 a month.

Related Posts:

Know your withdrawal strategy.

Do you know how much income you can pull from your nest egg? A good starting point for many retirees will be a well-known rule of thumb – the “4% rule”.

The 4 percent rule refers to your withdrawal rate. If you have a well-balanced retirement portfolio (60 percent stocks and 40 percent bonds), you can withdraw 4 percent of your account balance.

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

Related Post:

Think about your tax strategies.

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

Withdrawals from Roth IRA and Roth 401(k) plan 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. The amount you must withdraw will be determined by the IRS. If you have more than one retirement account, you need to withdraw money from each account.

You need to remember that RMD withdrawals might push you into a higher tax bracket and you need to plan how to pay for additional taxes.

Know your medical expenses and long-term care coverage.

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.

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.

Medicare does not cover premiums, deductibles, co-pays for doctor visits, dental and vision care, long-term care, personal care, and other expenses. It is important to remember that healthcare is the second biggest expense in retirement after housing and you need to plan for it.

We all know that 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 a few years ago. And that number does not even include long-term care costs.

2. Expect to go through the emotional stages in retirement.

woman - rocky beach - things to know before you retire

Most people go through an emotional process when adjusting to retirement. In the beginning, there is a feeling of freedom and being like on a vacation that is going to last forever. Then, after a few years of fun and enthusiasm, you might start feeling bored.

You will learn that retirement is not a constant vacation. Eventually, you will realize that you have to fill up your days with something more meaningful than just traveling or playing golf.

It is good to be mentally ready for your new phase of life. You do not want to realize that most days you have nothing special to look forward to when you wake up in the morning. Or you do not have any reason to leave your house during the day. Or deep inside you wish you were not retired.

Like many other life transitions, retirement comes with emotional and mental adjustments. If you learn more about the emotional stages of retirement you will know what to expect. That knowledge will help you to better navigate the transition to retirement.

3. Structure your days in retirement.

Before retirement, your life has a predictable routine. The alarm goes off, you take shower, have breakfast, pack your lunch, and head out the door. Your job gives you focus and discipline and forces you to get up every morning. Work takes priority and everything else in life is scheduled around it.

But when you retire, there is nothing but time. Thus, you need to replace the established routine with something new. Waking up and trying to figure out what to do each day can be depressing.

You need to create a new routine that helps you plan your days otherwise you have no reason to get up every morning. It could be a hobby, a sport, a new skill, a part-time job, or volunteer work. Do not go to retirement without having a plan about what you are going to do to stay busy.

Related Posts:

4. Stay socially active and grow your friendship.

After many years of meeting people at work and seeing them every day, it might not be possible to keep up with them when you retire. You might feel isolated from your friends. You might start drifting through the days without much to do if you do not get socially connected with other people.

You can stay connected with your old friends by planning social events. If you are friends with other couples, invite them over for dinner or board games once a month. For many people, their social life relates to their work. However, you can do many things to improve your social life in retirement.

Take advantage of your free time in life to make new friends. It is not hard to find a volunteer job, join a group in the local community, or start taking a class at a senior center. Another thing you can do is to start a new club or join the club. It could be a reading club, a walking club, or a gardening club.

Staying socially active will restructure your daily routine. It will help you to feel that you are doing something meaningful beyond watching Netflix, doing crosswords puzzles, or reorganizing the house.

Putting It All Together

I am sure you have thought a lot about how you will enjoy your life in retirement. But there is a good chance you never thought much about how to transition from the workplace to retirement.

The key to a happy and comfortable retirement is in planning and preparing for it. It includes not just financial planning but envisioning your life in retirement. The more time you spend to know your retirement lifestyle goals, hobbies, and activities, the more successful you will be at this transition.

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

Are you ready to retire? Do you have a clear picture of your retirement? Share your thoughts in the comments below.

Have you enjoyed this post? Share it!

A Guide to Understanding a 401(k) Plan

by Maggie Leave a Comment

a couple in bed dreaming of retirement -a guide to 401k plan

No one needs to remind you that you should save for retirement. After all, no matter your age and how far away your retirement is, you want to enjoy your golden years without having to worry about money.

In the past, many employees could depend on a traditional pension from their employer. But that was then. With traditional pensions becoming a rarity, we are pressured to do the heavy lifting of saving for retirement on our own. Although the word ‘401k’ is synonymous with retirement planning, how many of us know and understand all the rules of a 401k plan?

Here is a guide to understanding a 401(k) plan:

What is a 401k and why enroll in a 401k plan?

The 401k plans are retirement plans offered by employers. And a 401k account is tied to your employer because the employer sponsors the plan. A 401k is just the name of your retirement savings account where you save money for retirement.

A 401k account is a tax-deferred retirement account. It allows you as an employee to set aside a percentage of your pre-tax earned income to a retirement account.

When you set aside your pre-tax money you avoid paying taxes on that income today and allow those contributions to grow tax-free until retirement. But when you retire and start withdrawing money from your 401k account you will have to pay taxes on your withdrawals.

Why enroll in a 401k plan?

The best benefit of the plan is to reduce paying taxes today and allow your contributions to grow tax-free for a long time.

However, you cannot avoid paying taxes entirely. You will pay income tax on any money you withdraw from your 401k when you retire.

How to open a 401k account?

Opening a 401k account is pretty simple. You can open an account when you do your paperwork as a new employee. However, you are not required to start the 401k when you are first hired. It can happen at any time. You just need to fill out the paperwork and decide how much of your paycheck will be going into that account. Your contributions will be automatically deducted from your paycheck.

How much can you contribute to a 401k plan?

Retirement savings accounts are regulated by the IRS. That means the IRS sets the rules as who can use a 401k plan, and how much they can contribute. The amount you decide to contribute to your 401k is up to you. However, the IRS regulates the contribution limits every year.

The 2021 maximum 401k contribution:

The 401k contribution limit is $19,500. But if you are age 50 or older, the catch-up contribution limit is an additional $6,500. So, you can save a total of $26,000.

Whenever possible, increase your retirement contributions up to the maximum allowed in your retirement plan. If you are a few years away from retirement, being short on retirement savings can be problematic.

The benefits of a 401k plan.

There are many tax advantages of saving money to a 401k plan.

First, the contributions you make to your 401k are tax-deductible. That means you do not pay taxes on the money you put into your account.

Your 401k contributions will be deducted from your gross income which will reduce your taxable income for that year. For example, if you made $75,000 and contributed $15,000 to your 401k, you would be only paying taxes on $60,000.

Next, your employer may match your contributions. The employer match means that your employer agrees to match a portion of your money going into the 401k account. Usually, the employer match is between 3 to 6 percent.

For example, your employer offers to match 50 percent on up to the first 6 percent you choose to contribute. So, if you make $75,000 a year and choose to contribute 6 percent of your annual salary ($75,000 x 0.06 = $4,5000), your employer will contribute an additional 50 percent of that amount. That free $2,250 ($4,500 : 2) will steadily grow over time.

If you do not put money into a 401k, there is no match. If your employer offers to match your contributions, I suggest at least save as much as the match. That is free money. In the end, you will be earning extra money for doing absolutely nothing.

Lastly, the money inside your 401k account grows tax deferred. If you open an investment account, you will have to pay taxes on your capital gains and dividends every year. But in a 401k plan, your money grows tax-free as long as it stays in the plan. And thanks to the power of compounding, your retirement savings will be growing faster over the years.

How to invest your 401k money?

Most 401k plans offer a limited number of investment choices. Your 401k is tied to your employment. When you sign up for a 401k plan, you have to choose from the investments offered by your employer’s plan.

Most 401k plans typically allow you to choose from a small number of pre-selected mutual funds that vary from conservative to aggressive. Some mutual funds are index funds, which track major market indexes. And other funds are target-date funds, which select a mix of investments appropriate for your age, but the fees can be very high.

Investing in index funds or target-date funds present less risk for you as an investor, than investing in individual stocks. But you need to understand which funds are best suited for your retirement goals, your age, and your risk tolerance.

Related Posts:

What to do with 401k when you change jobs?

When you change jobs, you have a couple of options:

Leave 401k with your old employer

Your first option is to do nothing and leave it with your old employer. If you like the investment options and costs offered by the plan administrator, your money will continue to grow in that 401k account.

But the biggest drawback to this option is that you can no longer contribute. To keep investing, you will have to open a 401k with your new employer. That means you will be juggling multiple statements and accounts every month.

Rollover old 401k to new 401k

Your second option will be to carry out a 401k rollover. A 401k rollover means you transfer your funds from the old 401k to your new employer’s 401k plan.

The rollover makes sense if you do not want to leave money with your former employer’s 401k, or simply want all your money in one account. That way, you will have more control over your contributions, and both of your accounts will be consolidated. Your new 401k plan administrator should help with transferring the funds.

Rollover 401k to IRA

Another popular option is to roll over the old 401k into an individual retirement account (IRA). I personally prefer this option because 401k plans usually do not offer the best investment options, and the administrative and management fees can be high.

A 401k plan can only be offered through an employer, but an IRA account can be open by anyone. You have a choice to select a brokerage firm, open an account and then ask them to roll over your 401k funds into a new IRA account.

One of the best benefits is that you do not need your employer’s approval when deciding how and where to invest your money. And typically, IRAs have lower fees than 401k plans so, you can save big on it over the years. Most of my IRA money invested into the low-cost index funds from Vanguard and Fidelity.

Cash out 401k

Finally, you still have an option to cash out your 401k money. It sounds like an easy option to cash out your old 401k and start over with a new employer. But if you try to cash out before a certain age, you will face an early withdrawal penalty. While there are exceptions like death, disability, or medical issues, you might lose a lot of money if you choose to take out your 401k funds early.

401k withdrawal rules

a dollar bill with coffee beans in a bowl-benefits of 401ks

I believe it is wise to keep money in the 401k or IRA rollover plans as long as possible and delay taking money from these accounts that will add to your taxable income. But if you decide to cash out your 401k funds before a certain age, you need to be aware of rules on distribution.

Penalty for an early withdrawal:

If you withdraw 401k money before age 59 ½ and do not meet an exception that allows you to withdraw early, you will be paying both a 10 percent tax penalty as well as regular income tax on the funds you got withdrawn. That makes early withdrawals very expensive.

Impact of an early withdrawal:

For example, if you decide to take out $5,000 as an early withdrawal, you will have to pay the following, including penalties and taxes:

Early withdrawal penalty (10 percent) = $500
Federal and state tax withholding (20 percent tax rate) = $1,000
The balance you receive: $5,000 – ($500+$1,000) = $3,500

You have to be 59 ½ years old to withdraw 401k (or IRA rollover) money without any penalties. However, certain conditions allow you to withdraw 401k money without any penalties at age 55. Sometimes it is called the Rule of 55.

The IRS makes an exception for middle-aged people. It spares you the 10 percent tax penalty if you have been laid off, fired, or leave a job between the ages of 55 and 59 ½. But you still have to pay a regular federal and state income tax on your withdrawals.

From IRS – the Rule of 55 explained

401k plan Required Minimum Distributions

The IRS calls them Required Minimum Distributions (RMDs). You cannot keep money in your 401k portfolio forever. When you turn 72 (it used to be 70 ½), the IRS requires you to start taking money out of your 401k.

Your 401k plan administrator will be sending you yearly payments from your account. The RMD payments will be different for each 401k owner. Each year you are required to withdraw an amount based on your life expectancy and how much money was accumulated in your account. And if you fail to make a withdrawal you will have to pay a tax penalty and still make a withdrawal. Additionally, you will pay a regular income tax on your withdrawals.

If you have more than one 401k, you will need to take a separate RMD from each account. That is why it will be easier to combine all 401k accounts into one when you retire or ready to withdraw your retirement savings.

It is good to remember that many brokerage firms offer a service of calculating your RMD and sent the paycheck to you automatically.

The Bottom Line

The 401k plan has grown to become the most popular retirement plan in America sponsored by employers. Many people depend on the money they have invested in 401k plans to provide for them in their retirement years. A 401k plan offers a great opportunity to save for your golden years. Without your 401k savings, you will be only relying on a Social Security paycheck which can easily turn into a meager existence.

Like this Post? Share it!

Financial New Years Resolutions for Baby Boomers

by Maggie Leave a Comment

a piece of paper _new year resolutions for baby boomers

Happy 2021! In the spirit of the New Year, I have put together a list of financial New Year’s resolutions for baby boomers.

These financial goals are especially important for people who are planning to retire within the next 10 years. I personally think that the beginning of the year is a great time to start something new and work towards a goal.

Here is the list of financial New Year’s resolutions for baby boomers:

1. Determine how much of the nest egg you will need.

When you are near retirement, it is important to know how much of the nest egg you will need to live comfortably for the rest of your life. How do you figure it out? You have options.

The typical advice is you should aim to replace 70 to 80 percent of your annual pre-retirement income. For example, if you earn $70,000 per year before retirement, you should expect to live off $49,000 to $56,000 per year.

Also, you can use an online retirement calculator. Take a few minutes to enter initial information and then see the numbers, and where you stand today.

Vanguard – Retirement Nest Egg Calculator

Or you can use your current expenses and determine how it will change when you retire.

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.

Related Articles:

2. 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: Social Security, pension, part-time job, or rentals (if you have any).

Another source of income will come from your nest egg – investments and retirement savings:

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

Getting a clear picture of your retirement income will help to make sure you have enough money to cover all your living expenses.

To make your assets last through the next 20 or 30 years, use the rule of thumb to withdraw 4 percent of your portfolio annually.

For example, if you have $500,000 in retirement funds, you can spend roughly $20,000 ($500,000 x 0.04) per year when you retire. Add this number to your Social Security, pension, and other savings, and calculate if it is enough to support the retirement of your dreams.

Related Articles:

3. Set a target retirement date.

woman and man walking on the beach - financial new year goals for baby boomers

Another important financial goal for baby boomers who are near retirement is to set a target retirement date. We all need to plan for the day when we are ready to retire or can no longer work.

Based on your target retirement date, retirement income, and what you want to spend in retirement, you can determine if you have enough money saved for your golden years. If it is not enough for a comfortable retirement, move the date, and save more into your retirement funds.

Related Article:

7 Financial Mistakes to Avoid in Retirement

4. Update your budget.

What is your budget? How much you want to save and how much to spend in 2021?

Sticking to your budget can help to know where your money is going. If you want to save more money for your upcoming retirement, begin eliminating some expenses that may not be important to you anymore.

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.

Balancing income with your spending plan will help you to save more money for retirement.

Related Articles:

5. Maximize your retirement savings.

Whenever possible, increase your retirement contributions up to the maximum allowed in retirement plans such as 401(k), IRA, and Roth IRA.

When you are a few years away from retirement, being short on retirement savings can be problematic. The best option is to start reducing expenses in your budget, so you can put more money into your retirement savings.

The 2021 contribution limits are:

$19,500 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 $26,000.
$6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people age 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).

Related Article:

Why Do You Need to Max Out Your 401(k)?

6. Get out of debt before retirement.

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.

The best advice for baby boomers is to pay off all your debts before you retire including a mortgage.

When you are working, you have years of earned income to pay a mortgage, credit cards, student, or any other kind of loan. 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, big withdrawals from retirement funds could push you into a higher tax bracket.

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

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.

Related Article:

How to Pay Off Debt Before You Retire

7. Rebalance your portfolio.

list of 2021 goals - financial goals for baby boomers

The 2020 year has been a volatile year for financial markets. 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.

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.

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

Related Articles:

8. Think about the future medical cost.

Health care is expensive. Unfortunately, many baby boomers forget to include it in their financial plan. Medicare will cover most of your routine health-care costs if you retire at age 65 or older. Unfortunately, it does not pay for all medical bills, and it does not pay for long-term care at all.

Underestimating health care expenses or how to pay for long-term care can be a big financial mistake. Think about your future medical cost and find ways to protect your retirement savings.

Consider buying long-term care insurance which can help to pay for home health aides in your late years. If you buy long-term care insurance now, your premiums will be lower than if you wait several years.

It is recommended by many financial gurus to open a health savings account (HSA).

The money you can contribute to HSA is tax-deductible or pre-tax. And any increase in the value of your account is free from federal taxes. But it has to be used for qualified medical expenses otherwise you will be paying income tax and penalties on your contributions.

The 2021 HSA contribution limits are:

$3,600 for individual coverage
$7,200 for family coverage

You can put money into HSA every year until you enroll in Medicare benefits. After that, you are no longer allowed to contribute. However, money that you do not spend will be accumulating in this tax-free account until you need it in retirement.

Related Article:

5 Ways HSAs can Fortify Your Retirement

9. Plan where you will live.

Where you will live in retirement could have a big impact on your living expenses. Consider this option – sell your big house in an expensive location and move to a smaller house or condo in a low-tax state. In this case, your living expenses will be reduced, and you might have some extra income to pay for things you love to do in retirement.

You may also consider staying in your town but moving to a smaller home or condo. That will be more financially manageable while living on a fixed income.

But if you are planning to move to a big city you should be financially prepared to spend more money because retiring in a booming metropolis can be pricey.

Related Articles:

Final Thoughts

I know many people do not bother with New Year’s resolutions. But I find them to be very motivating. New Year’s financial resolutions are a great way to take steps to move towards your new goals.

What is your New Year’s resolution? Do you have any financial goals?

Like this post? Share it.

15 Ways to Live on Less in Retirement

by Maggie 2 Comments

older couple walking - live well on less money in retirement

Do you know how much money you need to live on in retirement? Have you been honest with yourself?

Everyone wants to have a happy retirement without the worry of not having saved enough or spending your savings too quickly.

Before you retire, look at your current expenses and see how much you will need when you leave the 9-to-5 world. Be honest about your retirement savings and calculate if it is enough to support you for the next 20 or 30 years.

Fortunately, a happy retirement does not always come with spending a lot of money. It only takes several steps to reduce retirement expenses so you can live well on less money.

Explore 15 ways to live on less in retirement:

1. Stop saving for retirement.

Once you retire, you no longer must save for retirement. If you have been saving 10 or 20 percent of your paycheck for decades, you no longer have to do that.

You do not need to save thousands of dollars to your 401(k) or IRA retirement accounts each year anymore. This chunk of money can be eliminated from your budget. It is time to start spending your savings.

2. Save money on commute.

Once you retire, you do not need to commute to work every morning. This means saving money on car parking, maintenance, and gas.

Every year we spend over $6,000 on commute including parking, maintenance, fuel for 2 cars, and T-passes for the subway to get to Boston. When our commute is over, we can save a lot of money every year.

3. Do not buy expensive clothes.

When you stop working and spend many hours at home or in your garden, there is no need for ‘a dress to impress’. Say goodbye to your business clothes and wear something comfortable for your new daily activities.

I know that I will save some serious money when I stop buying expensive clothes, shoes, and accessories for work. My new outfits will be something simple and comfortable and what I want to wear. The best part is that I will spend less on clothes and more money on fun stuff, travel, and activities.

4. Downsize to a smaller home.

Homeownership is one of the most expensive categories on the retirement budget. That is why downsizing to a smaller home is a smart way to lower your monthly living expenses.

Moving to a smaller home will help to reduce utility bills, cost of maintenance, repairs, and cleaning. If your current home is paid off, you can use available home equity to buy a smaller home without taking on another mortgage. Moreover, moving to a smaller home will save you more money in the long run.

If you do not plan on downsizing, consider other housing alternatives to reduce monthly expenses:

Rent out a room in your home.
Rent out your garage.
Take a roommate and split the mortgage payment.
Make money with Airbnb and rent out extra rooms in your home.

5. Relocate to a low-income or no-income-tax state.

Moving out of a high-income tax state in retirement is one of the best ways to stretch your retirement funds. But you still have to ask yourself if it worth it. Probably it does not make any sense to move If you do not pay a lot of state income tax today and do not expect to pay more when you retire.

Living in a high-income tax state like Massachusetts, we paid a maximum of $6,200 over the years. I am not sure if it worth it for us to sell our home, hire movers, find a new place to start a new life somewhere else only to reduce a tax bill.

However, if we paid $20,000 or more in state income tax and expect to pay the same amount in retirement, I would plan on moving to a low-income or no-income-tax state.

Article: Perils of Moving to a No-Tax State

6. Reduce insurance premiums.

home office - live on less money in retirement

Before you retire, you should plan how to live on less money. One of the ways to cut your retirement expenses is to reduce insurance premiums. You can ask your home insurance company for a senior discount.

Many home insurance companies provide discounts for retirees because they spend more time at home which reduces the risk of fire, flood, or robbery.

Another way to reduce your insurance premiums is to tell your car insurance company that you will no longer be driving to work. The more you drive, there are more chances for you to get into an accident.

Daily commuting is a big risk factor because car collisions typically happen during periods of heavy traffic. When you retire, contact your car insurance company, and ask them if you qualify for a low-mileage discount.

7. Downsize your vehicles.

We own 2 cars, and last year we spent $4,950 a year (or $412 a month) on license fees, insurance, maintenance, repairs, and gas. We even had spent more money when our cars were financed with loans.

Owning 2 or 3 cars is often required when you live in the suburbs and work in the city or have kids. But when you retire, you do not need to have 2 or 3 cars. It stops making so much sense and hurts your budget.

To live on less money in retirement, you should downsize to one car or no car at all if you want to move to the city and use public transportation.

8. Reduce your bills.

There are many ways to reduce your retirement expenses. One of the most popular ways is to get rid of cable and cancel your landline phone service.

I have to admit we still have a landline phone, and it costs $30 a month or $360 a year. When we retire and start living on a fixed income, it will be a lot of money to pay for something we do not use often anymore.

I know that we should cancel our landline and use only cell phones. In the modern era of texting, Facebook messaging, and emails, people do not call each other as they used to do.

We have cable TV, and our last year bill was topping at $75 a month or $900 a year. I struggled with the question: “Should I get rid of cable?”

Honestly, we do not watch hundreds of channels on TV, and I do not like to be interrupted with commercials every 10 minutes. Internet streaming service like Netflix and Amazon Prime costs much less and offers more entertainment.

So far, we did not get rid of cable but changed from Verizon Fios TV 300+ channels to Verizon Fios TV plan with fewer channels for a price of $55 a month or $660 a year.

If you plan to live on less money in retirement, you should not overpay for things you do not use often.

9. Find free activities or use senior discounts.

As a retiree, you can find many great things to entertain yourself for less money. There are many free local summer concerts, fall festivals, events at libraries, or social activities at a senior center.

Many museums offer free days or evenings for visitors. When you do not have to work, it is much easier to visit museums on a weekday with a smaller crowd.

Using senior discounts is another way to live on less money and still enjoy your retirement. You can ask for a senior discount at many places:

gym membership
local museums and concerts
state parks and beaches
golf courses
restaurants
local stores and supermarkets

Article from AARP: 10 Places to Ask for Senior Discounts

10. Find travel deals and travel off-season.

flowers-lake-mountains - travel off-season

Traveling is the number one goal on the retirement bucket list for many baby boomers. But traveling is expensive. It includes hotels, air tickets, restaurant meals, rental cars, entertainment, tours, and more. But If you want to travel on less money, and still fulfill your retirement dream, look for travel deals or travel off-season.

In retirement, it is much easier to save money on travel because you have the freedom to travel when the best deals are available. Start with looking at cheap accommodations. Instead of paying for the hotels, look at websites like Airbnb, VRBO, or Vacation Rentals to see what they have to offer at your destination.

Airbnb

VRBO (Vacation rentals by owner)

Vacation Rentals (Home to Go)

Check airline prices and find the cheapest flights. Sign up for free price alerts. Be flexible on dates and be flexible with your travel destination. Fly out early because the lowest price flights are the first flights in the morning. Fly on the cheapest days of the week – Tuesday, Wednesday, and Saturday.

Look for senior discounts to museums, concerts, parks, and other tourist attractions. With available discounts and deals, you can save a lot of money and travel for less.

If you like to travel but concern about spending too much money, do not travel far. Drive a few hundred miles rather than fly to your destination. You will save money on air tickets, airport food, overpriced hotels, rental cars or taxi, currency exchange, and other charges.

11. Cook at home and cut down on eating out.

Eating out often might be expensive when you start living on a fixed retirement budget. One of the ways to save money is to cook more meals at home.

I like to cook, but I can see how it might be boring to eat at home all the time when you are retired. You easily get caught in a routine of the same dishes – pasta and meatballs, fish and rice, or chicken noodle soup.

To save money and still have fun, plan on eating out at lunch rather than at dinner. Many restaurants have a cheaper lunch menu. Instead of eating out once a week, start eating out only once a month.

If you want to dine out in an expensive restaurant, avoid ordering appetizers, alcohol, and dessert to save money on the highest price increase items.

To cut your spending on dining out, take advantage of deals and discounts. If you receive a 10 percent senior discount on a $120 meal, it will reduce your annual cost of dining from $1,440 to $1,296. So, you can keep $144 in your pocket and still have fun eating out on a reduced bill.

Ask about senior discounts before ordering the meal. Special savings like senior discounts are not always advertised or offered by the restaurant employees because of age sensitivity.

To save more money sign up for Groupon to receive coupons or discounts. And check out the AARP website for restaurant discount deals.

Article: AARP Restaurant Dining Discounts.

Groupon website

Also, consider a rewards credit card for your everyday spending – like getting cash back. If you do not have any debt, you could easily use a credit card to earn cashback on your groceries and even travels.

The key to making the most out of credit card options available today is using them for purchases you can afford to pay off and paying your bill in full every month.

Best Cash Back Credit Cards of 2020

12. Stay healthy and fit.

To keep your medical expenses down, stay healthy and fit. The cost of healthcare is rising every year. So, it is important to stay healthy in retirement. Start with developing good habits in your new life. Create an exercise routine and follow it thoroughly.

You do not need to spend extra money on expensive personal trainers or gym membership. Walking, running, or cycling outdoor is more than enough to stay in good physical shape for years. Explore your local walking and jogging trails. Those 30 minutes a day you need to spend walking can be done in a local park or greenway path.

Leave the car at home and walk or bike to the local store, bank, or post office. Gardening or decluttering are easy ways to keep you active and fit.

Follow a healthy diet rich in whole grains, vegetables, fruits, and low-fat dairy products. Additionally, do not forget to shop smart and always read food labels to avoid foods high in cholesterol and saturated fat.

13. Keep track of retirement expenses.

It is important to stick with your budget and keep track of your retirement expenses. You may need to adjust your spending habits and make it fit within your budget.

Always remember how hard it was to save for retirement. Do not fall into the consumption trap and find new ways to spend less on your purchases.

For example, try to limit spending at your favorite stores by setting up a fixed amount or just bring cash. If you do not have enough cash to pay for your purchase, do not allow yourself to pay for it with a credit card.

Another way to control impulse spending is to shop online. Compare prices, read reviews, and do not buy more stuff just because it seems cheaper. Setting up a budget for different occasions like a holiday budget or a vacation budget will help to keep track of your expenses.

14. Pay off debt before you retire.

If you want to live well on less in retirement, consider paying off any high-interest debt such as a credit card before you stop working.

It can be difficult to pay off debt while living on a fixed retirement income. These monthly payments may become one of your largest retirement expenses. Getting rid of debt before retirement will help you to live with less stress and fewer liabilities.

15. Set up systematic withdrawals from retirement funds.

Once you leave the 9-to-5 world, do not give yourself limitless access to your retirement funds. You do not want to go through them fast.

To avoid unlimited spending, you should use the ‘4 percent withdrawal rule’ for systematic withdrawals from your retirement funds. You can call it ‘my retirement paycheck’.

Set it up as a direct deposit coming from your retirement savings – 401(k), IRA, Roth IRA – into your checking account once a month. This process will help to control your spending. Otherwise, you might start treating your retirement funds as a big pot of cash.

Have you saved enough money for retirement? Do you know for how long will your money last? Have you thought about retiring on less money and the ways to do it? Share your thoughts in the comments below.