Retirement Planning

6 Costly Retirement Mistakes to Avoid

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.

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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Where Will You Live When You Retire?

by Maggie 2 Comments

A woman standing in sunflower field-where to live in retirement

Have you thought about where will you live when you retire? I am sure when you are busy with your life, career, kids, vacations, and holidays the everyday day routine keeps your mind away from these thoughts. But when you are getting closer to retirement you may realize that you need to plan for your next phase of life.

Many baby boomers will downsize, sell their homes, and move to a sunny state. But some of us will prefer to retire in place. The reason behind this decision that people love their homes and their communities where they often lived for several decades and feel comfortable to retire there. Even they decide to move it will be not far from their current location. According to the surveys many baby boomers prefer to live closer to kids, family, and friends than to relocate to a warmer climate.

There are a few options for baby boomers to decide on where to live when they retire:

Retire in place
Relocate closer to kids, family, or friends
Relocate to a warmer climate (from New England cold winters)
Move and live abroad

Retire in place.

two women on a bench - where to live in retirement

There are more and more retirees planning on retiring in place instead of relocating. I have read that this trend has become extremely popular in recent years. The baby boomer’s generation is more active and engaged in life and activities than the previous ones. Internet and technology make it easier to keep in touch with the kids, family, friends, and the whole world.

Wider variety of services such as home meal delivery, house cleaning, personal care assistance, paid caregivers and pet care make it easier for seniors to live in their homes independently. This trend is also driven by the growing cost of retirement communities and assisted living facilities.

Deciding on how to retire in place can come with its own challenges. If you want to stay in your own home for the next several decades you will need to make it age friendly. Most of the homes we live in today are not equipped for old age. We need to have fewer stairs and more accessible features in our homes with easy maintenance.

When you grow old you might consider doing some renovations to make your home more accessible:

No-step entry into the home
Grab bars installed in bathrooms and showers
Walk-in shower instead of a traditional bathtub
No-slip flooring to prevent slips and falls
Lower kitchen cabinets for easy access
Raised washer and dryer with adjustable height counter
Electric stairlift
Low maintenance yard, and more

While you might not be able to live independently in your home forever, these changes will help to make your home a safer and more functional place. Some changes could be simple modifications while others are big renovation projects.

According to the Home Advisors, the average cost of remodeling for disability accommodation can range from $5,000 to $20,000.

Home Advisors website.

Aging in Place Article: 18 Features of an Age Friendly Home

Move and live closer to kids and/or family.

women hands on laptop-move closer to kids in retirement

When planning on where to live in retirement, the first choice for many people is to live closer to their kids. According to the surveys, wanting to be closer to a family is one of the most popular reasons for baby boomers to relocate rather than a warmer climate. If you need to relocate to another state or town it might take some planning.

Moving can be expensive in terms of money and time spent. You need to consider many factors when planning for relocation:

Housing cost
Relocation cost
Access to health care facilities

Housing cost is one of the highest retirement expenses.

When you retire you do not need a big house because your kids are grown and live on their own. A bigger home is more expensive, and it is harder to maintain physically. That is why many baby boomers prefer to downsize either by moving to a smaller home or spending less for a home of equal size. It helps to save money on housing and maintenance costs.

Are you planning to buy a new home or prefer to rent while relocating?

If you are planning on buying a new home, you need to think about mortgage financing. What that means you will be carrying mortgage debt well into retirement while you start living on the fixed income.

Besides making a financial decision, you need to think about how it will fit into your retirement lifestyle. If you love to own your place you will have to deal with yard work, leaky faucets, broken A/C, or a water heater.

Renting is an attractive retirement option. Most retirees do not want to deal with maintenance and prefer a maintenance guy or a landlord to solve their problems. In addition to that, some rental apartment buildings have many amenities like swimming pools, gyms, saunas, and entertainment rooms.

Renting is also popular if you want to live closer to your kids but not sure you are ready to spend the rest of your life at that location. If you like to travel, renting has another advantage. You can lock the door and go away without worrying about the yard, home maintenance, or any other things you need to deal with as an owner.

Once you decided to move out of your home you will face the relocation cost. And if you will hire professional movers it will cost you a lot.

Most people feel overwhelmed by the idea of selling home. But moving out adds more anxiety to the whole process. Imagine that you have to take all your possessions, all your memories, and lifestyle you have created over the years and pack it in the boxes. In addition to emotional departure moving out will come with extra expenses.

First, you need to decide what to do with all your belongings – what to keep and what to sell. Next, you need to pack, figure out logistics, and hire movers.

The average moving costs depend on your local area. Usually, local movers charge by an hour. In the Metro Boston area where we live to hire professional movers is expensive. When we decide to move out it will cost us $119 per hour for 2 movers and truck.

According to the American Moving and Storage Association, the average cost of a move is $2,300 within your state and $4,300 between states. But an interstate move could be as high as $7,500 and depends on the amount of stuff you are moving, moving services, and the distance between your old and new homes.

When you think about relocation in retirement, access to good healthcare is a must. At the beginning of your retirement, you probably will be active and healthy and need only routine doctor visits. But as you grow older the access to retirement facilities, hospitals, and transportation for people with disabilities will become a necessity of life.

Relocate to a warmer climate in retirement.

When it comes to relocating, many baby boomers are searching for places with a lower cost of living. Others want a warm climate and beautiful scenery.

If you have lived in areas with cold climate and lots of snow you might want to relocate to a southern state with a warmer climate. If you like fishing and boating, you would prefer to relocate to a place near the river or lake. Finding a perfect retirement spot near the mountains will fit the lifestyle of many people who like to hike.

Taking climate into consideration is important if you want to stay active and involved in things you love to do.

According to statistics, Florida, Arizona, and South Carolina are the three states which see the largest arrival of retirees if you are looking for a warmer climate. Florida takes number one on the list because the Sunshine State has a perfect mixture of beautiful beaches, sunny weather, and low taxes.

When choosing where to relocate make sure to understand how new location and accommodations will fit into your retirement lifestyle. Because there is a difference between a place you loved while vacationing there and a place you will be living for a long time.

Move and live abroad in retirement.

mountain village - vineyards-tractor-move abroad in retirement

Retiring outside of the US is becoming a popular option among baby boomers. Moving abroad may be emotionally and physically difficult, but it can offer an exciting adventure in your golden years. Some of us are dreaming about exploring the rich culture, food, and lifestyle of other countries rather than playing golf or lying on the beach.

However, moving abroad is not only about packing your bags and buying a plane ticket. It is more complicated and needs serious planning.

First, think about how you will receive Social Security benefits. Then, how to withdraw money from your retirement funds if you move outside of the US. Another question is how to pay taxes and what to do with your belongings in the US?

There are other things to consider if you decide to move to a new country. You will need to get a residency visa, open new bank accounts, figure out how to transfer money from the US to your new place. Do not forget to look at the currency exchange rates and see if you will be losing money on the exchange.

Market Watch Article: Retiring Abroad Is a Lot More Than Living at the Beach

Access to good quality healthcare is a must as you get older. So, make sure that your new country has modern medical facilities, well-trained doctors and it must be affordable. Find out if you can join the national healthcare program or need to buy private medical insurance.

One of the most important factors is affordability. When choosing a retirement destination, it is important to move to a country where the cost of living is low enough so you can stretch your retirement savings.

It is hard to imagine that many baby boomers can afford to retire in Italy, France, or Switzerland. These countries may be the most desired to retire to, but they are not cheap. Countries such as Ecuador, Panama, Mexico, and Costa Rica offer low cost of living, solid healthcare, and public transportation system together with established expat communities.

Retiring abroad is not easy and it is not for everyone. But worth the efforts if you find the right place to move. You can live a more pleasant and comfortable lifestyle at a fraction of the price than retiring in the US.

International Living Article: The World’s Best Places to Retire in 2020

Putting It All Together

If you are getting closer to retirement you might already have an idea how and where you want to spend your days. But deciding on where you want to live for the next 20 or more years requires an open discussion with your partner.

There are many important considerations and questions to ask yourselves. Buying a nice condo by the water or on a golf course may fit many baby boomer’s retirement lifestyles. Others, like me, would prefer to sell the house, cash out, and spend money on traveling the world.

What about you? What are your plans for retirement? Where do you want to live when you retire?

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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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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.

Top 7 Financial Mistakes to Avoid in Retirement

by Maggie 2 Comments

winter-a woman-financial mistakes in retirement

Most of us looking forward to retirement. We imagine doing lots of things we have not had enough time to do while still working. My dreams about retirement are all about traveling the world and spending more time with the family.

But dreaming about happy retirement is not enough. To have a pleasant and secure retirement depends on how well we prepare for it. Also, it depends on how few financial retirement mistakes we make before start living the life of our dreams.

Preparing for retirement could be complicated. You have to understand your life expectancy, when is the best time to collect Social Security, when and how to withdraw money, and how to pay for big expenses such as long-term care.

Many people prefer to wing it and go to retirement without any kind of planning. They think that if you have a Social Security paycheck and a little savings everything will be fine. Unfortunately, this kind of conclusion might be a costly mistake.

Several financial mistakes can harm your financial security in retirement. But you can avoid it by planning so you can retire with confidence.

Here are the top 7 financial mistakes to avoid in retirement.

1. Mismanaging when to start collecting Social Security benefits.

railway - road to retirement-financial mistakes

When you’re planning for retirement one of the most important decision is when to start claiming Social Security benefits. This decision is personal and depends on your life expectancy and how much you need the money.

In general, waiting until your full retirement age or even 70, is the smart move. Social Security paycheck is a guaranteed income and it will keep coming in as long as you live.

Many people have their financial plan based on the assumption that they will work well into their 70’s and receive continuous income. But the reality can be somewhat different.

According to statistics about half of the retirees stopped working before they thought they would because they lost their jobs, couldn’t find a new one, tired of old jobs, or have health issues. Early retirement before you can afford it can be damaging for your financial security. When you retire too early you might face a risk of running out of money or have to go back to work.

Avoid this mistake and don’t just start collecting your Social Security at any time. Learn more about it first so you can maximize your paycheck for life. You can increase or decrease your benefits. If you start collecting the benefits early at age 62, the paycheck will be reduced to up to 30 percent.

The full benefits will be paid at your full retirement age which is 66 or 67 for most of us these days. But If you can delay collecting benefits until age 70, your monthly payments will be increased by 8 percent for each year between full retirement age and 70. Waiting until age 70 is a great benefit because you’ll receive the highest Social Security paycheck for the rest of your life.

If you’re married, the smart move would be to coordinate your time of claiming benefits as a couple. The spouse with the lower expected benefits can collect early. The other spouse can delay collecting the benefits allowing the future paycheck to grow bigger.

When one spouse dies, one of the couple’s Social Security paychecks will go away. That is why it’s important to have a higher earner to delay claiming Social Security as long as possible. So, the survivor will have to get by on the larger of two checks.

Remember to find out what you can expect from Social Security and incorporate it into your retirement plans.

2. Underestimating how long your retirement will be.

coffee pot-flowers-happiness in retirement

People are living longer and longer. For many of us, it would be desirable to retire as early as we can. But then it could be dangerous for our finances if we end up living an exceptionally long life. There is a big chance of running out of money in our late years.

According to the Social Security Administration, “About one out of every four 65-year-olds today will live past age 90, and one out of ten will live past age 95.” If you retire at age 62 and live to 90, you’re looking at 28 years of retirement. You need to have enough retirement money to support you for that long.

If you’re fortunate to spend many years in retirement your nest egg should survive withdrawals over a long time. To avoid running out of the money you need to plan well. Look at your retirement accounts and estimate if you have saved enough money to retire. If not, save more, work longer, and/or delay your retirement.

3. Withdrawing from retirement funds when the market is down.

euro coins and banknotes-house- retirement portfolio

The recent years market crashes and recessions wiped out millions of people’s retirement savings. The 2008 financial crisis sent everyone’s investments down significantly. Though, the market has recovered since then many people lost their money if they sold everything at the bottom of the market.

The 2020 market crash due to coronavirus pandemic affected millions of baby boomer’s investment portfolios. And probably many of us will never recover from these losses. The recent market crash changed many baby boomer’s retirement plans. If you were planning to retire this year or even next year, you may need to change this decision and give your portfolio extra time to recover.

There is a lot of uncertainty and terrifying news in the world today. It could be very stressful if you’re getting closer to retirement.

However, the best thing you can do is to stay calm and don’t panic. You’ll only lock in losses if you start selling your stocks and withdraw money from retirement accounts when the market is down. It may be nerve-wracking to see money evaporating from your retirement portfolio.

But don’t make any rash decisions and sell your assets, because you’ll regret it later. Remember that these bad times shall pass, the stock market will recover, and you’ll be in a strong position to retire once it does.

You can avoid the risk of pulling money out of retirement accounts during the market downturn by having multiple sources of income to draw from. Plan on having assets that are not dependent on market fluctuation such as cash reserves, emergency funds, annuity. The more options you have the better you’ll be positioned to minimize the impact of market losses.

4. Maintaining the same level of investment risk in retirement portfolio.

When you were younger you had no problem investing in risky investments because you had time to recover losses. But when you get closer to retirement you don’t want to gamble your savings. If the market goes down, you will have little time to rebuild them.

You cannot predict the market and eliminate the risk of losing money entirely. But you can take steps to help decrease your exposure to risk by adjusting and diversifying your portfolio. To avoid having to sell stocks at loss you can adjust your asset allocation before you start spending your retirement savings.

When you get closer to retirement, you should re-evaluate your investment strategy. For many years you’ve saved and invested money with one goal in mind is to grow your assets. Now, as you’re about to retire, you have to focus on another goal – make sure your assets will last.

Take time to re-evaluate your overall investment strategy and decide what is the best way to invest your money. With age, we think about preserving capital rather than making big profits in the stock market. It’s recommended to have a 60/40 portfolio for people who are close to retirement. The invested money should provide income and growth of your portfolio during retirement years.

Many people make a mistake of getting too conservative by investing more than 50 percent of their portfolio in bonds. Bonds are good for preserving the capital, but they don’t give enough growth to beat inflation. That’s why you still need to have money invested in stocks/ mutual funds so it will grow over time.

Your portfolio should be balanced for your age and risk tolerance between individual stocks, mutual funds, bonds, and cash. If your portfolio not properly diversified and concentrated mostly on stocks, that kind of risk factor could hurt you in the future.

Some retirees go too conservative with their investment portfolios and invest everything in CDs and other cash-like investments. This is one of the biggest mistakes because inflation erodes the purchasing power of the dollar. To avoid this mistake add stocks (equities) to your portfolio to provide growth potential. If you retire at 65 and spend 20 years in retirement, you need to have enough growth to make your money last that long.

5. Draining retirement savings and not tracking your spending.

books-sunglasses-beach-spending plan in retirement

When you stop working it can be easy to get carried away and start spending money on travels, hobbies, grand kids, or anything else you were dreaming about. It’s important to have a budget in retirement. With no plan for tracking your spending, you can drain your retirement savings fast. It will be easy to have budgeted $4,000 a month but to realize you’re spending $6,000 a month.

Your living expenses will change after you stop working. You will spend less on eating out, lunches, business clothes, commute, etc. But you will spend more money on new hobbies, activities, and travels. You might decide to buy a vacation home, a new car, a boat, or spend money on remodeling your home.

Some new retirees celebrate their new life in retirement by going on a spending spree. If you’re a new retiree, you need to know exactly how much money you have to live on.

Your goal should be to have a spending plan that includes the cost of “need to have” and “want to have” expenses. Once you calculated your essential or “need to have” expenses, make sure it can be covered by guaranteed income from Social Security, a pension, or an annuity. Then you can see how much money you can spend on your bucket list.

Having a monthly budget and tracking your spending helps to make sure your money will last.

6. Carrying debt into retirement.

street-lights-debt-financial mistakes in retirement

Avoid this big mistake by carrying debt into retirement because it could increase your chances of running out of money fast. When you start living on a fixed income it’s 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.

If you have plenty of income sources having debt may not be a big deal for you. Otherwise, plan to pay off debt before you retire so you’ll sleep better at night knowing you’ll have the freedom to spend money on yourself.

7. Underestimating healthcare expenses and long-term care cost.

hospital-scanning equipment-healthcare expenses in retirement

We all know that health care is very costly, but many of us forget to include it in our retirement planning. Underestimating health care expenses or how to pay for long-term care can be a big mistake. Yes, Medicare provides health insurance, but it doesn’t pay for all medical bills and it doesn’t 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 long-term care cost is not included in this number. A sudden medical emergency or serious illness can wipe out your retirement savings.

To avoid this financial mistake plan for medical expenses and be smart about Medicare by choosing the plan that will serve you best. Make the most of all the Medicare program offers and be good about all required screenings and preventive care. Don’t forget to visit your doctor and get regular check-ups, so that if any problems get caught early you can do something about them.

Think about how to reorganize your life so you can stay healthy. What you eat and how often you exercise will impact who you are in 20 years. You might reduce your overall healthcare costs by staying healthy.

Long-term care insurance might be a solution for many future retirees. There is a big chance for many of us that one day we will need help with daily living tasks like dressing, bathing, cooking, or even eating. Not everyone can rely on family or friends for long-term care help.

Health Savings Account (HSA) can help to save more money. Also, you can set up a separate bank savings account or put money in a certificate of deposit (CDs) for future medical expenses.

Putting It All Together

The financial mistakes can increase your chances of running out of money in retirement. These mistakes can ruin even the most carefully planned retirement. If you dedicate a little bit of your time learning about retirement and planning for smart moves, you can end up with tens of thousands of dollars more than you’ve expected. That can make a huge difference when you retire and start living on a fixed income.

What do you think are the big financial mistakes in retirement? Have you made some yourself? Please share your thoughts and ideas with us in the comments below.

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