Retirement Planning

How to Use Home Equity in Retirement

coins - potato - home equity in retirement

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

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

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

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

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

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

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

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

What is home equity?

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

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

How home equity works.

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

$550,000 – $250,000 = $300,000

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

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

$600,000 – $250,000 = $350,000

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

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

Here is how to use your home equity in retirement:

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

small house on mountains - home equity in retirement

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

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

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

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

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

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

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

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

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

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

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

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

Sell your home and move somewhere more affordable.

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

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

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

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

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

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

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

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

Sell your home and move abroad.

mountains-lake-flamingo - move abroad in retirement

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

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

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

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

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

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

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

Many people would prefer to stay in their homes and retire in place. They want to remain in their neighborhood for life. In this case, a home-ownership might provide several options to fund your retirement without the risk of stock market investments.

One of the options is a reverse mortgage.

‘A reverse mortgage is a loan available to homeowners, 62 years or older that allows them to convert part of the equity in their homes in cash’. In simple words, as an older homeowner, you will be allowed to borrow money against the value of your current home.

Article: Your Guide to Reverse Mortgages

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

The best part is that you will receive a portion of your home equity in cash without requiring to move out. But the loan has to be repaid when the owner leaves the house. A reverse mortgage can be flexible, and you can take HECM as a line of credit (HELOC), lump sum, or an annuity.

One option is to use HECM for your medical or long-term care expenses late in life when you run out of money. Another option is to set up an annuity to increase Social Security and any other retirement income you will receive.

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

Article: Retirees Should Consider Reverse Mortgages

Putting It All Together

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

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

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

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

How to Create Retirement Lifestyle Goals

by Maggie Leave a Comment

type writer - coffee- create retirement lifestyle goals

Have you ever thought about what your retirement lifestyle would be like? How are you going to spend your days and weeks? Have you thought about creating your retirement lifestyle goals?

With retirement approaching, I have a wonderful vision of my new life. Sleeping late. Taking time to go through the day. Enjoying my morning coffee on the deck or just being lazy.

However, after years of a structured life and busy schedules, it will be hard to deal with endless hours. Going from working a full-time job to having no specific plans for each day might be exciting or depressing.

The lifestyles of today’s retirees are so different from the lifestyle of our parents. Today’s retirees are so active. They travel, volunteer, work part-time, play sports, or start new businesses. They like to spend time with family and friends and learn new technology or skills.

Most future retirees think about financial goals of retirement – “Can I afford to retire?” “How much money do I need to have a secure retirement?” While financial security is important, it is only a small part of what it means to have a happy retirement.

If you are in your 50s or 60s, planning your retirement lifestyle is a smart idea. Look at your retirement as a perfect opportunity for new creations and new adventures because it can be the best time of your life.

Begin the planning process by creating your retirement lifestyle goals. You have been creating goals to achieve things throughout your life and planning a retirement lifestyle is no different. After all, having a goal means you know where you are going and what it takes to get there.

Here are some tips for helping you to plan your future lifestyle:

Envision your retirement lifestyle.

How do you envision your retirement? The point of answering this question is to define what will be important in your new life.

The minute you say goodbye to your coworkers your full retirement starts. What is next for you? You need to figure out what you would like to do for the next 20 or 30 years of your life.

Take a couple of minutes to ask yourself:

How will my life change when I retire?
What will I do with my time?
What do I like to do?
Who will I spend my time with?

Start by setting up big picture goals. What kind of things you would like to do when you retire. First, take a piece of paper and create all the goals you like even you are not sure you can afford them.

Then, group the goals between Wants (what you would like to have) and Wishes (what you wish or dream to have). Call it your retirement to-do list or bucket list.

Here are a few ideas of retirement lifestyle goals:

Travel – What are your travel goals? Do you want to travel every year? Or do you want to make one special trip? Where do you want to travel? Do you have a travel fund? Have you set up your travel budget?

Celebration – Celebrating a special event can make a great goal. What special events do you look forward to celebrating? A family reunion, an anniversary, or a retirement party? Or maybe your daughter or son’s wedding coming up and you want to help to organize and pay for the wedding.

Downsizing – Moving out of your big house into a small rental apartment or condo can be a big lifestyle changing event. It will require a lot of planning such as selling the house, reorganizing your belongings, downsizing your vehicles, finding a new place to live, etc.

Home improvement – Do you plan to continue living in your home for a long time? Do you have big plans to renovate your “old house” to be your dream home or to be more age-friendly?

Vacation home – It is a dream for many people to have a vacation home. Maybe now it is a good time for that vacation home you always wanted. Make it a retirement lifestyle goal and make it come true.

A sailboat, or a luxury car – Do you always wanted to have a sailboat or to drive a luxury car? Then go for it. Make it a lifestyle goal and be happy that you will be driving what you want.

Start a new business or new hobby – If you want to start a new business or develop a new hobby make it a goal and make it happened.

Health habits – Creating new health routines can make an excellent retirement lifestyle goal. Initially, you can start by going to the gym every morning and establishing better sleep routines. Next, you might decide to stop eating processed food, take cooking classes, and learn how to cook at home.

Social network – The professional network you built before retirement is not going to satisfy your social needs in retirement. When you stop working it will be hard to keep in touch with many of your colleagues. They will move on with their lives at work and you will move with your new retirement life. Make it a retirement lifestyle goal to develop new relationships and create your social network.

Volunteer – Many people plan to do some form of volunteering after they retire. Volunteering is a great way to make new friends, enjoy time with like-minded people and simply get out of the house.

Transform your big goals into small steps.

While we are working, we are accustomed to reaching the goals set by others. In retirement, we need to learn how to create the goals relating only to ourselves.

When you set a clear goal, it helps to get a sense of direction.

I like to write down my goals on a piece of paper. In the beginning, my goals come out as wishes. I would write on paper “I would like to write a book”. But then a few weeks later the wish becomes a goal, and I would put it on my agenda. Then I start taking small steps in that direction and slowly my wish becomes a well-designed plan.

If your big goal is to lose weight, start by breaking it into small steps. In the beginning, you can plan on walking 3 times a week. Then slowly you begin jogging 3 times a week. Next, you would look at your eating habits and maybe decide on cooking homemade meals or go vegan for a month.

Creating retirement lifestyle goals will help to transform your wishes into action plans.

Regardless of the goal, the results of this simple process can be powerful. It will help to clarify your direction, provide a feeling of control, and give you a sense of accomplishment.

Structure your days.

Recently I read several articles pointing out that you need to learn how to live slowly in retirement. The idea behind this approach is to enjoy every day instead of ticking things off your to-do list.

Take your time and think about what you want to accomplish by the end of the year. What do you want to do during the summer? And maybe what are your plans for the winter?

You can plan to learn many things – how to sew, how to restore furniture, how to bake, or cook a few new recipes. You can organize a get together event or a trip to visit friends next summer.

The key is to have an overall plan and then break it into smaller steps. Having a couple of things set in each category will help to manage your time.

Have a sense of accomplishment.

a woman jumping over hills - creating lifestyle goals

I have started blogging in 2019. My first post was published on January 17^th. I still remember this date clearly because it was a very important moment in my life. The idea of blogging came up as a wish instead of writing a book. I decided to do a little bit of research on this topic. Then after a year of researching, I found myself with a new blog and multiple social media accounts.

I have to admit I struggled to manage a full-time job and blogging as my new side hustle. Being a non-native English speaker adds to this challenge.

The technical part of blogging is the hardest one. I spent hours trying to set up my website and making it work. In addition to writing and editing blog posts, I have to deal with email marketing, sign-up forms, plug-ins, images, website maintenance, and more.

But I am not planning to stop blogging any time soon!

Every day I try to do better with time management. It gets easier with a routine. Once I break down the bigger goal into smaller pieces, it feels more achievable. And each time one of those steps got accomplished I can pat myself on the back.

Final Thoughts

With a little planning, your retirement lifestyle can be exactly what you imagine. Make your retirement years the best time of your life.

You can create your own active and happy retirement without a million dollars saved in your retirement funds. Retirement is not just about financial planning. It is about your time and how you spend it.

Have you ever thought about your retirement lifestyle goals? How can you break down those goals into manageable steps?

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Are You Financially Prepared to Retire?

by Maggie 4 Comments

middle age couple - financially ready to retire

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

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

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

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

Get a clear picture of your retirement lifestyle.

What do you want to do when you retire?

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

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

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

How are you planning to fill in your days?

There are a few questions to ask yourself:

Do I want to spend more time with my grandchildren?

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

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

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

Where do you want to live when you retire?

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

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

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

If you want to retire in place, ask yourself:

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

Calculate financial needs to support your retirement lifestyle.

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

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

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

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

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

Get a clear picture of your retirement income.

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

As a retiree, you receive income from multiple sources:

There are several sources of guaranteed income:

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

Other sources of income:

Part-time job
Rental income
Business
Dividends

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

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

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

Develop your withdrawal strategy.

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

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

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

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

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

There are a few problems associated with following this rule:

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

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

Pay off debt.

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

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

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

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

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

Determine how to cover medical expenses.

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

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

Thus, you will need to find and buy your health insurance coverage. Individual health insurance is expensive and could cost more than $1,000 a month. Make sure to shop around for the best prices.

Even being eligible for Medicare brings its own set of challenges because it does not cover all medical expenses. Medicare does not cover premiums, deductibles, co-pays for doctor visits, dental and vision care, long term care, personal care, and other expenses. This means you need to include healthcare costs in your retirement budget.

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

Remember about tax strategies.

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

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

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

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

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

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

Putting It All Together

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

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

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

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

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

6 Costly Retirement Mistakes to Avoid

by Maggie Leave a Comment

old woman on the bench - retirement mistakes to avoid

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

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

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

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

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

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

Mistake #1 – you live in an expensive area.

city view - living in expensive area in retirement

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

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

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

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

What to do:

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

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

Mistake #2 – you have too much debt.

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

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

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

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

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

What can you do:

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

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

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

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

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

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

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

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

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

How to avoid this retirement mistake:

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

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

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

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

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

What can you do:

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

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

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

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

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

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

What can you do:

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

Article from Retire Guide: Health Savings Account (HSA)

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

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

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

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

Mistake #6 – you spend retirement money fast.

kitchen remodeled - costly retirement mistakes

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

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

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

What to do:

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

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

How much should you withdraw from retirement accounts?

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

Putting It All Together

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

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

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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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