Retirement Planning

Top 7 Financial Mistakes to Avoid in Retirement

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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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 Steps Guide to Organizing Finances for Retirement

by Maggie Leave a Comment

women planning tasks w/ sticky notes-organize finances for retirement

When I think about retirement I think about financial security in my golden years. It’s not about the size of your nest egg, but about how to manage your finances.

You need to get a clear financial picture before you quit your job. You need to figure out everything about how many accounts you have, how to manage them, in what order to withdraw money, tax liabilities, how your investments will generate income.

Organizing your finances for retirement will help you to feel more comfortable with your retirement decision. Instead of giving up on the retirement bucket list, you want to match your lifestyle to your available resources.

Moreover, organizing your finances for retirement will give a sense of control over your life. It will make the transition to retirement much easier to manage.

In this post, I want to go over 6 steps required if you want to get your finances in order before retirement.

1. List all your retirement accounts.

laptop, notepad and coffee -organize finances

In retirement you’ll be paying yourself from the savings you have accumulated over the years. Thus, the first step to organizing your finances should be listing out all your retirement accounts.

Over the years Roman and I accumulated several 401(k) accounts from different employers. We managed to roll over them to our individual retirement accounts – IRAs and even Roth IRAs.

So far, we have multiple retirement accounts – (1) 401(k), (1) 401(k) Roth, (3) IRAs, (2) Roth IRAs and (1) investment account. I want to simplify our finances before we retire and combine them into one account.

When I roll over these accounts to a consolidated investment account it will be much easier to work with available funds. It will be easier to manage money withdrawals and decide on an investment approach with only one account.

Listing out all your retirement accounts will give you a better idea of the available money you have to manage.

2. Write down your assets and liabilities and calculate your net worth.

white graphing paper with numbers - organize finances for retirement

You next step is to organize your assets and liabilities/debt. This step should help you to get a general overview of your finances and estimate your net worth.

You can do it on a simple piece of paper or create a spreadsheet in Excel, Word, or Google.

How to Make a Spreadsheet in Excel, Word, and Google

Assets

List everything you own. Start with your major assets like home, cars, boat, vacation home, rental properties, collectibles, gold coins, and anything else that has tangible value.

When you list these items try to come up with their real value and not the price you want to sell those things. Your major assets gained a lot of value over the years and can be sold if you’re ready to liquidate them or in a bad financial situation.

In addition to gathering information about the value of your major assets, you need to add information about other savings outside of your retirement accounts. List all your bank checking and savings accounts, investment accounts, stocks or bonds, CDs, and money market accounts.

Liabilities/ debt

List everything you owe. This should include mortgage balances, car loans, student loans, credit card debt, and any other debt or loan you may have.

Your net worth

Calculating your net worth is quite a simple task. Calculate the total of your assets and subtract the total liabilities/debt from that number.

Total Assets – Total Liabilities = Net Worth

You might have a negative net worth, which means you have too much debt. In this case, you need to work your way out of it as soon as possible. It will be a big mistake to start your retirement with too much debt on your hands while living on a fixed income.

3. Social Security as a retirement income

long pier on the lake - retirement security

In 2020, the average Social Security benefit for a person who retires at 66 is $18,036 per year or $1,503 per month. If you’re married the combined income will be higher.

Many Americans will rely on that paycheck as a basis of their retirement income. Social Security is called a guaranteed income. And the best part of it that it will keep coming in as long as we live.

When you start organizing your finances for retirement, it’s important to know how much your Social Security paycheck is. Look at your statement from the Social Security Administration.

Social Security

When you open the link to the website, sign in, or create an account if you don’t have one. Your Social Security statement will show how much you could expect to receive at a different age.

Depending on your birth date and year, you’ll see several numbers of expected income. The lowest income will be If you decide to claim your benefits at age 62, and the highest at age 70.

Whatever age you decide to retire, be careful of claiming your benefit right away and look at the numbers first. I always like the idea to retire early at age 62, but delay claiming the benefits until full retirement age, so I’ll get higher income for life.

4. Calculate your income, expenses, and cash flow.

bulletin board with sticky notes - organize your finances for retirement

It’s important to calculate your retirement income and expenses so you would know how to manage your spending.

Income

List all the retirement income you expect to receive. This includes your Social Security paycheck, pension, estimated income from retirement accounts, investment accounts, rental properties, business (if you own), and a part-time job.

By gathering all information will help you to have a clear picture of what income will come from which account. Also, you should remember about a required minimum distributions (RMDs) which start at age 72 in 2020 (before it was at 70 ½).

Expenses

To find out how much money you’ll spend in retirement answer a few questions:

Where do you want to live in retirement?
How do you want to live in retirement? What is your lifestyle?

If you know where and how you want to live it will be easier to understand your retirement expenses.

All expenses can be divided between essential and non-essential living expenses. I like to call them “need to have” and “want to have” expenses.

Essential or “need to have” expenses:

Mortgage or rent
Utilities
Transportation
Food
Medical and other insurance

Non-essential or “want to have” expenses:

Travel and vacations
Hobbies and activities
Entertainment

You can add to this list donation to charity, gifts, or other contributions you‘re planning to have during your retirement years.

Calculate your cash flow

Calculate the total of your retirement income and subtract your estimated retirement expenses from that number.

Retirement Income – Retirement Expenses = Cash Flow

I like to calculate our cash flow because it helps to get a clear picture of our income and expenses. It’s not about how much money we’ve accumulated over the years, but how we manage our spending.

If we want to have a secure retirement and not to run out of money fast, we need to control our expenses. I want to make sure that our cash flow is positive which means we live within our means and don’t overspend.

If your cash flow is negative it means you live beyond your means and need to cut on spending. Negative cash flow can be altered by increasing your income or decreasing your expenses. I think it’s always easier to adjust your spending habits than your income.

Understanding your cash flow situation is important because it helps you to see what kind of life you can afford.

5. Re-evaluate your retirement investment strategies

person holding glass ball -investment options

While organizing your finances for retirement, it will be a good time to re-evaluate your overall investment strategies. You need to decide what is the best way to invest your money. The invested money should provide income and growth of your portfolio during retirement years.

With age, we tend to get more conservative with our investments. When we are getting closer to retirement, we start thinking about preserving capital rather than making big profits in the stock market.

It’s recommended to have a 60/40 portfolio when you’re close to retirement. But you still need to have money invested in stocks so it will grow over time. Many people make the mistake of getting too conservative by investing too much of their portfolio in bonds. But we still need to have growth in our retirement portfolio so we can beat the inflation.

On the other hand, it will be a mistake to invest all your money in the markets. When you retire and stop receiving a steady paycheck, you need to have enough cash to pay for expenses and emergencies.

I like the idea to have one or two years of money available to provide immediate income. You can use a mix of cash and other safe investments like high quality, short-term bonds or money market accounts for quick access to funds.

6. Review all insurance policies

I try to review our insurance policies every year. But when you’re ready to retire you need to look at them more closely. Depending on your policy the home insurance could cover less or more than you need right now. The same applies to car insurance. It’s a good idea to check that your car policy isn’t covering a child who moved out of the house and not using your vehicle anymore. Make sure that your insurance policies have the cost and coverage to match your current needs.

Health insurance will come at a big cost in retirement. Our health is likely to decline with age and we will need more help from the medical professionals.

health-illness-graphic - long term care insurance

Long-term care insurance is an extremely popular topic that is discussed among financial advisors. You can spend almost $10,000 a month for full-time long-term care assistance or even more if medical care is needed.

On many occasions, Roman and I discussed if we need to buy long-term care insurance. So far, we didn’t come to any conclusions. It’s insurance and it’s expensive. You may pay a premium for years and after all, never use the coverage.

But what if one of us breaks a hip later in life. Who would help with cooking, cleaning, and bathing when the other partner is old as well? And how would you pay for someone’s help? Without long-term care insurance, you will have to spend down your funds before you see whether you qualify for Medicaid.

On the other hand, we need to look at it as we look at any kind of insurance. We have been paying for a homeowner’s insurance for years and never feel sorry that we never used it. The same was with our rental property. We had landlord insurance for a 3-family rental property we owned for years. The policy we paid for was around $1 million in liability coverage. But I feel happy that the property never burned down or being damaged so we would have to use the insurance.

It doesn’t matter if we either will need care, or we will not. What matters the long-term care insurance will allow us to afford quality care when we need it. Also, it helps to reduce the financial and emotional stress that long-term care situation can impose on the family.

Article by AARP: 5 Facts You Should Know About Long-Term Care Insurance

Putting It All Together

I’m sure that we all struggle to keep our finances in order. My biggest problem is that we have too many accounts. Lately, I have noticed that it’s getting harder to manage them. Before we retire, I wanted to make sure that we have a firm grasp of our financial situation.

My goal is to organize and simplify our finances the way we can enjoy our retirement instead of worrying about the financial unknowns. I want to have peace of mind knowing that we can manage our retirement savings wisely.

I believe that organizing your finances for retirement will help to be confident in the comfort of your next phase of life.

Have you thought about organizing your finances for retirement? Share with us your thoughts and ideas in the comments below.

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How to Protect Retirement Savings During Coronavirus

by Maggie Leave a Comment

For the average American who is saving for retirement the latest economic and stock market news associated with coronavirus sounds terrifying. The coronavirus pandemic disrupted our daily lives and affected our finances.

For those who are close to retirement, the financial news is the most frightening. You have been saving for retirement for decades and seeing all your savings going down brings havoc to your retirement plans.

How to protect your retirement savings is the most important question for many baby boomers.

When the stock market is volatile as right now it is hard to say how long this rough patch will last. For those who are 20 or 30 years away from retirement, this market downturn should not cause major concern.

Eventually, the market will bounce back, and you will have time to recover those losses. But if you are near retirement and your retirement savings took a major hit you may want to postpone your retirement plans.

According to the Market Rates survey:

36.4% of Americans within 20 years of retirement expect the corona crisis will delay their retirement.
37% of Americans aged 45 to 64 don’t know what their investments are doing in this environment.
Of those who know where their investments stand, 43.8% of people in the 45 to 64-year-old age group reported losses of at least 10%.

For many baby boomers maybe, it is not the right time to retire now with the stock market being in free fall for many days. But it is a great time to review your plan and try to protect your retirement savings.

Adjust your retirement age and time you want to retire.

With the stock market down, unemployment high and the whole country in lockdown is hard to predict how soon our life will get back to normal. We do not know if the economy will recover fast or the country is heading toward a full-blown recession.

If you are 5 to 7 years away from retirement you still have time to protect your retirement savings by adjusting the time of your retirement. Unfortunately, you cannot change anything if you are already retired and watched your retirement savings shrunk.

However, if you are a few years away from retirement you should try to wait it out until the market is in better shape. This way you will have time to recover your losses and improve your retirement funds.

Do you know if you have enough saved for your retirement?

Look at your current savings and compare them with your financial goals. You maybe still able to retire on time if your savings are in good shape.

But what to do when you are behind on your savings or your savings have been hit hard? In this case, you maybe better off saving for a few more years and adjust the time when you can retire.

Don’t cash out your 401(k) savings.

coronavirus -a man holding US dollar banknotes

When the stock market is volatile, your first reaction is to protect your savings and pull all the money from retirement accounts. We all have that feeling when we watch the market being in free fall and expect the market will only get worse. We feel that it is the right thing to do by cashing out now before we lose any more money.

The truth is by cashing out now you can make a costly mistake. Because you cannot lose money until you sell your investments. When you sell your investment and the market is down, you will be locking in your losses.

The best thing you can do right now is to ride out the storm and wait for the stock market to calm down. As soon as the stock market starts to recover, your investments will rise in value as well. You will be happy to know that you are not missing out on all potential gains when the stock market starts to recover.

In addition to that, if you pull out money from your 401(k) and IRA accounts before age 59 ½, you will have to pay a 10 percent penalty fee and income taxes on the amount you withdraw.

Review your portfolio and adjust for risk tolerance.

a man and a woman at the table looking at laptop - adjusr retirement portfolio

Right now, it is a good time to look at your portfolio and see if you need to adjust it for your age and risk tolerance. When you get older you should modify your portfolio. More money should be invested in conservative investments like bonds, treasury notes and cash investments with less money invested in stocks.

In order to protect your retirement savings, you need to diversify your investments. Usually, investments are diversified based on asset allocation, your age and risk tolerance.

I am sure that most people set up their portfolios a long time ago and enjoyed the healthy market long run of the last decade. But recently things have changed so fast that most of us did not have time to adjust our portfolios to the new stock market environment.

However, it is not late to make some adjustments and protect your savings from future market dips. Make sure that your investments are diversified properly going forward.

If you are in your 50s think about your risk tolerance. Then decide how to allocate any new money going into your investments.

If you are in your 60s you should allocate more of your money in safe investments going forward. This strategy will allow you to keep your investments as safe as possible if the stock market will continue to fall in the future.

For several weeks I have not had the stomach to look at our portfolio and see how much money we have lost. But from the last recession, I learned the importance of having cash reserves at all times. Since then we keep 5 percent of our retirement savings in cash. It helps me to sleep through the night knowing that if things go bad and we lose our jobs we have quick access to cash. We call it our spending bucket. It helps to know that we have a temporary source of cash to pay the bills.

I would recommend keeping part of your money stashed in cash if you are close to retirement. Theoretically, you should have enough cash to cover a year of bills or even more. It should help to survive through the market downturn when you are not working.

Your spending bucket should be invested in safe assets like money market funds or short-term bonds that are not subject to big price declines. Savings accounts and money market funds are considered as cash investments. These are called cash investments because they are as good as cash. You can withdraw them at any time without penalty fee.

Don’t stop your 401(k) or IRA contributions

laptop, cup of coffee, Iphone, flower pot on the table

I think that many people drive themselves crazy checking 401(k) or IRA balance every day. It is hard not to do that knowing that the stock market is in bad shape due to coronavirus pandemic. In the current financial situation, it is tempting to cut back on your contributions because you want to protect your retirement savings. It is really easy to feel you are throwing good money after bad. None of these are good feelings.

But if you are able to keep your job it is smart to continue your contributions to 401(k) or IRA. Stay the course and when the market recovers, you will be glad that you did not miss the gain from that growth.

Some financial gurus even recommend boosting your retirement savings and contributions. Since the stock market is down you have an opportunity to buy quality investments at low prices.

On another hand, social distancing and lockdown measures make it hard for us to spend money on restaurants, concerts, sports events, or travels. When you are mostly confined to your home take that extra cash and add to your retirement savings.

If you are in your 50’s and planning to retire at full retirement age, you have 15 years or longer to contribute to your retirement funds. Time and compounding could still work for you over this time period. Therefore, keep saving and contributing money to your 401(k), IRA, and Roth IRA.

But if you are in your 60’s you have less time to recover your losses unless you want to postpone the time when you retire. Check out how much is your social security and decide if you can live off that paycheck before starts withdrawing money from retirement funds.

Article by Forbes: 6 Steps to Reduce Financial Fragility and Protect Retirement After Covid-19

Final Thoughts

Sometimes I feel that the entire world is in panic mode due to coronavirus spread. This health crisis has changed the way we live, work, and socialize. We put our lives on hold while watching the stock market crashed and our retirement savings shrunk.

However, I believe you can protect your retirement savings by adjusting your risk tolerance, asset allocation, and time of retirement. Continue contributing to your retirement funds as much as possible. By following these guidelines, you will be in a much better position to meet your retirement goals despite market conditions.

How do you protect your retirement savings during the coronavirus crisis? Share your thoughts with us in the comments below.

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5 Tips on How to Downsize for Retirement

by Maggie 2 Comments

group of older people on bycycles - downsizing for retirement

Many of us over 50 already thinking about how to downsize for retirement and where to live for the rest of our lives.

However, downsizing can be a scary word.

The first reaction is to feel that downsizing means leaving the big house where you raised your kids and create priceless memories. Saying goodbye to a place you’ve called home for decades will be difficult for every family.

But you may want to make a change when the kids moved out and you realize there are only two of you living in that big 4-bedroom house. Getting closer to retirement is a good time to start evaluating what is important in your life.

By focusing on your priorities and passions, you can make space for the things that really matter. Downsizing to a smaller space could help you to simplify your life. It will allow you to shift focus from “maintaining stuff” towards experiencing life.

For many people downsizing also means reducing the cost of living, saving money and adding more to retirement funds.

Whether you want to save money, simplify your life, or be able to travel more, downsizing can be good for retirement living. Check out our tips to see if downsizing is the right choice for you.

Here are 5 tips on how to downsize for retirement:

Downsize to save money and reduce the cost of ownership.

folded dollar banknotes on a table -5 tips on downsizing for retirement

We are all emotionally connected to our home. However, home-ownership comes with huge financial responsibilities. Housing is the largest expense for most people. Do you know how much your current home costs you? if not, it is time to sit down and calculate the combined cost of mortgage, taxes, insurance, utilities, maintenance, repair, and renovations.

Average American household spends around $13,153 annually on home-related expenses without the cost of a mortgage. Our family spends more than $28,000 a year on mortgage, taxes, insurance, utilities, and maintenance. This is 25 percent of our annual budget without the cost of major repairs or home improvements.

Downsizing is a big decision that will affect your finances. Here are some questions to answer:

Are your kids grown, and moved out of the house? Is it a big house with a big yard? Do you have more space than you need? Do you live in a high property tax area?

If the answers are yes, what keeps you in your home?

The smart choice will be to sell your home and move to a smaller home or condo. Downsizing to a smaller home or condo will help to reduce your utility bills, property taxes, and cost of maintenance. This way you can save more money by reducing the cost of ownership and get extra cash into your pocket today.

In addition to that, downsizing can significantly increase your retirement savings and affect the quality of your life in retirement. After the sale of your home, you will end up with extra money that can be invested. Or your mortgage payments will be reduced if you get a mortgage for a smaller home.

Calculate the cost of selling a house and moving out.

If you decide to sell your home and move out it will come with the price. Even a paid-off home cannot be sold for free. When you talk to a local realtor, you’ll find out information about the local real estate market and for how much you can sell your home. Once you get the estimated price, you should subtract from that number the following:

Realtor’s fee (typically 5 -6% of the sale price)
Cost of upgrades and staging
Attorney fees and sale taxes
Your remaining mortgage balances

The final number will show how much money you’ll put in your pocket after a home sale.

Most people feel overwhelmed by the idea of selling home. But moving out add more apprehension to the whole process. Moving out of a home where you spent many years of living will come with additional expenses.

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

The average moving costs depend on your local area. Usually, local movers charge by the hour. In the Metro Boston area where we live to hire professional movers is very expensive. Once, we decide to move out it will cost us $119 per hour for 2 movers and truck, $139 per hour for 3 movers and truck and $169 per hour for 4 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.

Moving Cost Calculator – Figure Out How Moving Changes Your Finances

Decide what to do with your possessions.

table with tea cups, lipstick and young and old women hands

Over the years we have accumulated many things in our homes. We cherish our possessions and move them from shelf to shelf. There is an estimate showing that a quarter of Americans with two-car garages don’t use them for their cars, but as storage for family stuff.

Downsizing your family belongings can be a time-consuming process. And it will drain you emotionally and physically if not done without a good plan. If you’ve been living in your home for decades, it will take hours to go through everything you have accumulated.

First, you need to decide what is important and what you absolutely need to keep. Then pick what you want to sell, give away, or toss.

Here are a few ideas on how to purge closets and rooms while downsizing your home:

Sort everything out by categories rather than by rooms. Start with larger items like furniture and then make your way down to clothes, books, documents, and finishes with sentimental items like photos and kid’s artwork.
Scan all papers and legal documents. You can simply scan most of your legal documents to the computer. Then you can upload a file to the cloud using service like DropBox or save it to an external hard drive. But please remember to keep a hard copy of all documents like passports, birth certificates, marriage certificates, estate wills and trusts, and property deeds.
Scan and upload favorite family photos or your children’s artwork to your computer. It’s very convenient if you don’t want to take old boxes filled with precious memories to your new home.
Have a garage or yard sale for items in good condition. Post flyers in your neighborhood and invite family and friends to come or spread the word. Selling furniture or home goods in good condition will help to downsize and get extra cash to pay for your moving expenses.
Sell items on craigslist or E-bay. Craigslist is very convenient for bulky or heavy objects you don’t want to take with you. Take a few minutes to look on E-bay and Craigslist websites and see what others are charging for the same piece. Then take good photos of the items you want to sell and post them with a detailed description and estimated price.
Offer to give away furniture or home goods to your kids, friends, family members, and even your neighbors.
Bring items you cannot sell to a donation center like Goodwill or Thrift store. Don’t throw things in the trash. When possible, try to find them a new home. Donations of new and reusable items can be sold at reduced prices or help to fund free educational programs for low-income communities.

Decide if you want to rent or buy in retirement.

small houses on hilltop - 5 tips on downsizing for retirement

There are pros and cons to both renting and buying for retirement. I know that most people prefer to live in their own homes because of feeling safe and independent. However, there are still many good reasons for renting in retirement.

When you’re getting closer to retirement you no longer want the hassles of maintaining a large home. You don’t need to live in that 2,500 square feet house with a big yard if it’s just two of you. You are tired of mowing the lawn, raking leaves, or fixing faucets and lights.

You need less space and you want someone else to take care of the place. That’s why becoming a renter might be your option. You would like to have a janitor who would fix a leak in your bathroom and someone else would cut the grass and water the flower beds.

As a renter, you would have more free time and less maintenance. Your time will be spent on playing golf, visiting your kids and grandkids, going to an art gallery, or traveling the world and explore new places. And it is easy to pack up and move somewhere else if you want to travel or become a snowbird. You don’t have to worry about renting out or selling your home.

Living in a small space.

a woman holding a flower on a window sill

Have you thought about if you going to be happy living in a small space? If you decide to downsize and move from 2,500-square-feet to 700-square-feet condo, you need to consider how it will affect your new lifestyle.

Do you like to entertain and throw big parties? Do you have a big family and expect many overnight guests? Will you need extra space for a hobby?

The rooms will be smaller in your new home. And you might feel it difficult to visualize the new layout of your furniture, sports equipment, and other belongings in those rooms. In this situation, you probably should consider selling most of your big furniture pieces including dining sets and travel lightweight to your new home.

Moving out of your home to a new place could be incredibly stressful. You have to take all your possessions, memories and the lifestyle you’ve created over many years and turn it upside down. For most of us, it’s comforting to retire at home. For others, it’s a new way to explore the world.

Putting It All Together

Retirement should be an exciting stage of our lives. And ideally, it should be all about crossing items off our bucket list. But if we stay in that big house after the kids moved out, we will spend a lot of time maintaining it. Downsizing and moving to a smaller place can simplify our life. It will give us more time to hang out with grand kids, time to travel and see the world, or just do what we like to do, but never got to it.

What are your thoughts on downsizing for retirement? Share your ideas with us in the comments below.

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Rent or Buy in Retirement?

by Maggie 2 Comments

water view landscape with houses and boats - retirement

Housing costs will be one of the major living expenses in retirement.

Many people in their 50’s and 60’s think about downsizing and if they want to rent or own in retirement. To rent or buy is always a tough decision. Making that decision before retirement can be even more challenging.

You should figure out your cost of living in retirement, the potential house prices, the cost of home maintenance, property taxes and insurance, and then compare it with rent prices in the same community.

Besides making a financial decision, you need to think about how it will fit into your new lifestyle. Do you love to own your place and fix it up the way you want it? Or it will be a big relief not to worry about yard work, broken faucets or a water heater?

If you’re getting closer to retirement you might already have an idea how you want to spend your days. Buying a condo by the water or on a golf course might fit your retirement lifestyle perfectly.

Other people want to sell the house, cash out and spend money on travel.

How to figure out if you are better off renting or buying? Here are some key factors to help you with rent or buy decision.

Where do you want to live in retirement?

The good thing about retirement that finally you can live anywhere you want. It’s nice to know that you no longer need to live closer to your work or where your kids go to school. Instead, you can relocate to a place with a better climate, lower cost of living or just a place you were dreaming about.

Did you think about where you want to live in retirement?

Are you planning to relocate to a different city or state?
Do you want to live closer to your kids, grandkids or friends?
Or maybe you want to move abroad and live there for the next 5 or 10 years?

I have a long list of places where I want to live in retirement. But I’ll be honest with you, living closer to my daughter will be one of the biggest reasons why I might choose to make a move in retirement.

What is your lifestyle in retirement?

water pool next to Mediterranean villa - lifestyle in retirement

What do you want to do when you stop working? What kind of lifestyle do you want to have? What kind of activities do you want to be involved in?

Whether you realize it or not, you probably already have different ideas or dreams in your head. So, take a piece of paper and write down the list of your ideas. And don’t forget to discuss it with your partner to see if it will work for both of you.

Here are some ideas for your list and questions to answer:

Do you have any hobbies?
Do you like gardening? Do you like to read?
Do you like traveling?
What would be your daily routine when you stop working?
Are you planning on working part-time?
Are you healthy and active? What are you doing to stay healthy?

Where you’ll live and how you want to live in retirement will be one of the most important decisions you have to make. This decision will affect how much money you’ll spend on housing and how much you’ll have left to enjoy life. Compare and discuss with your partner the options of where and how you want to live in retirement.

If you’re in your 50’s or 60’s and working you still have time to decide. Moving can be expensive in terms of money and time spent. Therefore, you don’t want to make a decision that you’ll regret in a few years.

What are the pros and cons of owning in retirement?

table with smart phone, coffe cup and glass of water - discussion

When you start thinking about downsizing you need to decide whether home-ownership or renting makes the most sense for your situation. Like any decision, it will depend a lot on emotional and financial issues.

Pros of home-ownership

Emotionally attached. Home-ownership is special. We are emotionally connected to our home which means downsizing and selling a home will be painful.

Sense of stability. Home-ownership gives you a sense of security and stability. Many people feel safer knowing that they own their home. There is a sense of security in knowing that this is your home, and nobody will kick you out of it. Although, you don’t need to worry about a landlord bumping up the rent or start major renovation and ask you to move out.

Fixed mortgage payments. I know that many of us worry about mortgage payment and how to afford it in retirement. But if your mortgage is paid in full, you’ll only need to pay property taxes and insurance. Even you still have to make mortgage payments in retirement, it comes as a fixed payment.

Home equity and tax benefits. For me, there is another important advantage of home-ownership – building equity. I like to know that with every mortgage payment we accumulate more equity. We can take a home equity loan, line of credit or even a reverse mortgage if we need it.

Increase in value. Everyone knows that housing prices are going up. In many popular places, you can see a significant increase in value if you own a home for 10 or 15 years.

Control over updates or improvements. If you own your home, you can do any kind of improvements or renovations without asking landlord permission. The same comes with pets. There are different kinds of policies and restrictions on what kind of pets are allowed in rental buildings. When I was a landlord one of our tenants had a rabbit and they didn’t take good care of their pet. After tenants moved out, I had to renovate the entire apartment and repair the damage done by that pet.

Cons of home-ownership

Your money is tied up. If you decide to buy a house or condo in retirement you will be using a big chunk of money for down payment or paying full price in cash. Your money will be tied up in that home for a long time. It’s going to be harder to get a mortgage when you retire because you don’t have an income. So, if you consider buying a home, make sure to do that before you stop working.

Cost of repairs, maintenance, and renovations. We all know that owning a house means repairs, maintenance, and yard work. It could cost thousands of dollars if you need to replace the roof or your heating system. Maintaining the house and the yard takes time and money. Also, you might want to renovate your new home and make it more personal. But it could be expensive when you live on a fixed income.

Hard to sell. Your home is a real estate investment and real estate is not considered a liquid investment. It cannot be quickly converted to cash like stocks or bonds. As a result, it is hard to sell when you need money.

What are the pros and cons of renting in retirement?

a woman stretching in front of open window - rent or buy in retirement

Whether you want to rent a smaller house or a downtown condo, you need to decide what you want out of a rental. And again, it will depend a lot on financial and emotional matters.

Pros of renting

Renting is cheaper than owning. In some places renting makes sense if rent is cheaper than your mortgage. When we retire Roman and I want to move closer to the city. So far, our mortgage is $2,100 a month. There are several newly built apartment buildings in Cambridge, MA. When I checked out the prices, I found out that to rent a one-bedroom apartment would cost $2,500 a month or higher. Therefore, in that part of the city, renting is not cheaper than owning for us.

Your money is not tied up. Owning a home in retirement is not always financially wise. If renting is cheaper than owning, you’ll be better off to invest your retirement funds and let it grow. It can increase your retirement income because investments often grow at a faster rate than real estate. The only money you tie up is your security deposit. With the fixed cost of rent and no taxes or insurance, you can have enough cash for travel, activities or charity.

No yard work or maintenance. When you became a tenant, you hardly have any responsibilities, besides paying rent on time. So, when the water heater needs to be replaced or the faucet leaks, you just pick up a phone and call the landlord. You don’t need to worry about the upkeep of the rental building or any repair costs. You can spend time and money on your favorite hobbies and activities.

Flexibility – I like the idea that I can lock the door and go away. I don’t need to worry about who would collect leaves, trim bushes or clean gutters. And if I want to relocate to another place it is faster to end when I’m a tenant and not an owner.

Cons of renting

Increase in rent. Usually, rents go up every year. When you own a home, your mortgage is a fixed payment and you could only expect an increase in taxes and insurance. With rent, you could expect a 3 to 10 percent increase every year. Also, with every payment, you don’t build any equity. Besides, when the real estate market is booming and prices are going up, you don’t get any appreciation. Your landlord builds equity and gets all appreciation from the rising real estate prices.

No feeling of security. I know that dealing with a landlord is not always easy. I had been a tenant and a landlord myself. Your landlord can decide at any time to sell the place, force you to end the lease and find another place to live.

Inconveniences of renting. Renting a place might include many inconveniences. You will need to get permission from a landlord or property manager if you want to re-paint or decorate your place. Some rentals do not permit pets or have a strict pet policy. You might deal with issues like noisy neighbors, poor maintenance, shortage of parking places, and more.

Putting it all together

My husband Roman and I dream of traveling around the world when we retire. We want to explore the world living off our retirement money for 5 or 7 years. While we plan on buying a home, we consider renting a place as a home-base while we travel.

Short-term renting will fit our lifestyle. We won’t worry about leaving our rental apartment for several months as we would be if we owned the place. I will have more peace in mind locking up and leaving as a tenant than as an owner.

There are lots of options to consider. But the key is to decide what you would like to do. And then to have enough money to live your life the way you want it.

Have you thought about renting or buying in retirement? Share your ideas with us in comments.

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