Retirement Expenses

How Much of a Nest Egg Is Enough to Retire Comfortably?

a couple at the restaurant in Spain-to retire comfortably

Most people don’t have any idea how much they are going to need in retirement. It is an important question because your life changes the day you retire. You no longer have a salary that will pay your bills, and suddenly you are on your own.

At this point, you must know if what you have saved will be enough to live comfortably for the next 20 or 30 years. If the nest egg you have accumulated is too small, you might outlive your money.

When you calculate how much you need for retirement, you should match your retirement income to your expenses. For most people, it is easy to calculate retirement income especially for Social Security benefits. While it is harder to estimate your future expenses because expenses will vary depending on your lifestyle.

Until you have a good idea of what your retirement expenses will be and how they match to income, you cannot get a real number of how much nest egg you need for a comfortable retirement.

This article will help you get a better idea of how to calculate your nest egg so you can retire comfortably.

Step 1. Income

Do you know how much you have accumulated in savings and investments to quit your job and live a comfortable retirement?

Unfortunately, people tend to have a vague idea about their retirement income sources and overestimate how long their savings last.

The main sources of your retirement income will be:

Social Security. It is a proven fact that for many people Social Security is the main source of income in retirement. The average Social Security benefit in 2022 was only $1,550. Most people would find it tough to live on that paycheck alone.

If you do not know your number, just go to the Social Security Estimator to find out your number depending on the age you start collecting.

Pension. If you are lucky, a pension can be an enormous benefit because it produces predictable income from your employer.

Retirement accounts. Your 401(k), IRA, Roth IRAs, investments, and bank savings will generate income for you depending on how much you have saved.

Employment. If you choose to work in retirement, full or part-time, you can significantly increase your income number. A part-time job can make your retirement more comfortable if you did not save enough money.

Annuity. Many people are less worried about running out of money in retirement if they have a guaranteed lifetime income. You can turn some of your savings into lifetime income with an annuity. When you buy an annuity, you are exchanging a lump sum of money for a guaranteed lifetime income.

Should You Have an Annuity in Your Retirement Plan?

By the time you are 65, it will be hard to affect most of your income sources besides your job income. If your nest egg is small, you can keep working full-time, find a part-time job, or start a side hustle like Airbnb, blogging, etc.

Step 2. Expenses

Once you calculate your retirement income, you need to estimate your retirement expenses which will typically include fixed and variable expenses.

Look at how you spend your money today. Then take a piece of paper and divide every expense into categories (or buckets) which will allow you to see the big picture. At the end of the month, look at your categories and see how much you spend on each:

Housing (mortgage/rent, maintenance, property tax, property insurance, home improvement)
Utilities (gas, water, electricity)
Vehicle (insurance, maintenance, fuel, car loan)
Food (groceries, dining out)
Healthcare (out-of-pocket expenses, dental, eye exams, and glasses)
Insurance (health, life, liability)
Personal (clothes, education, personal debt, gym membership)
Entertainment (travel, cable, internet, books, memberships)

Keep in mind that your expenses will change in retirement. You have probably heard that you should plan to live on just 80% of your current spending after you stop working. But writing every expense now will help you have a better idea of what you will need in retirement and what you can cut out.

Once you know your sources of income and expenses, you can determine your nest egg number. The final number will be different for everyone. It depends on how old you are when you retire, how long you will live, and how well your investment portfolio will perform.

However, people tend to underestimate how long they live and what their medical costs will be. Also, people forget about unexpected expenses like car repairs, roof and furnace replacements, or financial help to family members.

Step 3. Compare your retirement income to expenses.

You have to have a good idea of what your retirement expenses will be and how they compare to your retirement income.

Consider yourself lucky if your retirement income sources are enough to cover your expenses when you stop working.

Unfortunately, most people’s income sources do not bring it enough to cover their retirement expenses.

Even though many expenses go down in retirement, inflation makes life more expensive for retirees. For most of us, the nest egg number has to be big enough to bring enough income otherwise we need to reduce our spending or adjust our retirement lifestyle.

If your current expenses are less than your income you have enough to retire. But if you do not, you need to figure out how to cover the gap.

For example, after calculating your Social Security, (pension if you are lucky) and a part-time job, your retirement income equals $35,000 a year. Your estimated retirement living expenses are $42,000 per year.

$42,000 – $35,000 = $7.000

The difference is a negative $7,000. This means that you need an additional $7,000 per year to maintain your retirement lifestyle.

How to cover this gap? The withdrawals from your nest egg should cover this shortfall. If you use the popular 4% withdrawal rule, you need to have at least $175,000 in retirement savings to cover the gap.

$175,000 x 0.04 = $7,000 a year

Step 4. How much is your nest egg?

How much of a nest egg you need in retirement depends on several factors.

The biggest factor is how much of your retirement income needs to come from that egg. If you have Social Security and a pension, your nest egg will be only used for additional income and big expenses.

But without a pension from your employer, Social Security will provide only a basic level of income. So, your nest egg (retirement savings) would be another source of income.

Ideally, Social Security and other guaranteed income sources should cover basic living expenses. And withdrawals from the nest egg should create enough cash flow to cover your other expenses.

A good starting point for many retirees and pre-retirees will be a well-known rule of thumb – the “4% rule”. According to experts, no matter how much you have saved, a 4% withdrawal rate will let you take money out of your nest egg for 30 years without fear of running out of money.

For example, if you want to get $20,000 per year from your nest egg, the account should be worth at least $500,000 when you retire.

$500,000 x 0.04 = $20,000 a year (1,666 per month)

Luckily, there are a lot of things you can do to fill that gap.

Step 5. Lifestyle

The lifestyle you plan to live will determine how much you need in retirement.

How expensive is your lifestyle? If you are planning to live in an expensive area, have a vacation home, drive nice cars and travel a lot – you will need more than $1 million saved.

But you can live comfortably with almost any budget if you match your expenses to your income. As I said before, it is hard to control income but there are many things you can do to lower your expenses.

Housing will be your biggest budget item. Housing costs as a percentage of spending will remain around 35% on average.

It is important to decide where you are going to live in retirement. If you plan to stay put and “age in place”, you should figure out how much it would cost to make your home senior-friendly. You should think about the costs of remodeling the kitchen, bathroom and stairs, and even maybe moving a master bedroom to the 1^st floor.

Aging Friendly Improvements for Every Home Remodeling Project

Also, if your housing expenses are too high you can downsize, sell your house, and rent, or move to a less expensive state.

If you are thinking of downsizing in the next few years, be realistic about what it will cost to buy something else and how much you will get for the sale of your house. Moving expenses and any kind of renovations big or small like new carpets at your new house will take money out of your nest egg.

Start watching real estate listings to get a sense of the market. If you are going to sell your home, start getting it ready for the market to avoid the last-minute rush.

Also, take time to think through what you really want your retirement to be. Do you want a small place where you can stay for up to 6 months and then travel for the rest of the year (my kind of dream scenario)? Would you rather have a bigger house for all of the family gatherings and for your kids and grandkids to visit?

You also need to plan for the unexpected. Many events typically come out of the blue. For example, you might have to start supporting a parent or a child, or some medical procedure needs to be covered out-of-pocket.

How Much a Nest Egg Is Enough to Retire Comfortably?

The answer is it all depends on your age, your goals, and your dreams.

The truth is that nobody can predict the future. If you want to retire in your 50s you will need to have a nest egg saved much bigger than if you want to retire in your 60s. And if you’re waiting to retire at 70, your number will be even smaller.

Look at your numbers, calculate your current cost of living and create a spending plan for the future. Then compare it to your retirement income based on different retirement age scenarios. It might take some time and hard work to get there. But knowing that you have enough money to live the life of your dream is incredibly satisfying.

Have you saved enough for a comfortable retirement?

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2023 New Year’s Resolutions for Baby Boomers

by Maggie Leave a Comment

Happy New Year 2023!

Each new year offers a great opportunity for a fresh start and new beginnings. Setting resolutions is a long-standing tradition. However, only about 10% of people achieve their New Year’s resolutions each year. And many people stop working towards their resolutions after just the first two weeks.

When it comes to finances, 2022 was a challenging year. With high inflation, rising prices on everything, and volatile stock markets ‘2022 was the sixth-most volatile year since the Great Depression’.

Almost 81% of Americans are concerned about their financial New Year’s resolutions and believe that inflation makes it harder to meet their goals.

But making New Year’s resolutions is a great way to change your life for the better. The new year can be a great time to think about what is possible in your near future. Also, the new year is a great time to set some good financial goals. But make sure to set some small realistic goals that will help you work towards larger goals.

Even though we all like to set up new goals and resolutions, different generations have different goals for the new year.

If you are a baby boomer, here are my tips and advice to help you make your 2023 New Year’s resolutions.

1. Eliminate any debts.

Why is it so important to reduce or eliminate debt?

Debt is always a slippery slope because the interest will eat massive chunks of your spending money. The faster you can get rid of it, the faster you can get ahead.

That is why the beginning of the year is a great time to sit down and create a debt payment plan.

There are two strategic and popular methods to get out of debt faster. The Avalanche method helps to reduce the debt that carries the highest interest rate. The Snowball method helps to get rid of debt with the lowest balance first, and then move on to the next lowest one.

The way the snowball approach works is you arrange all of your debts from largest to small ones. Pay off your smallest debt first. Then once the smallest debt is paid off, the money you were paying toward it will be applied to your next smallest debt.

With the avalanche approach, you will start paying off the debt with the highest interest rate and then move to the next highest.

How to Pay Off Debt Before You Retire

Goals to get out of debt:

Identify what debt to pay first.
Set up a debt payment plan.
Consider reducing other expenses to pay debt faster.

2. Increase retirement savings.

Sometimes we do not realize how expensive it will be to retire.

Building a nest egg that allows for retirement income to be close to 100% of pre-retirement income is a hard financial task. Unfortunately, very few people are confident in their retirement savings goals. Most people do not have the proper number in mind, and they forget the impact of inflation on their savings.

In terms of total retirement savings, retirees need to be able to live on no more than a 4% annual withdrawal from their retirement assets. You are not ready to retire if you have minimal savings. Social Security is generally not enough for a comfortable retirement. You will need to keep working and saving more money.

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

Goals to help you save:

Set a monthly savings goal.
Analyze your budget to see how much you can save.
Reduce your spending in a specific category each month.
Save a portion of your paycheck each month.
Increase your contributions to retirement plans – 401(k), IRA, Roth IRA.

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3. Save more for emergencies.

One of the biggest worries about money among baby boomers is that you do not know what will happen in the future.

You do not know if it would be enough to maintain your lifestyle in retirement and if you would not run out of money later when you are in your 80s or 90s.

When you retire, you do not have the security of your job to rely on and have to live on a fixed income. While you cannot exactly plan for the unknown, you can create a backup plan for emergencies.

In general, every household needs an emergency fund to cover unexpected expenses and it should be between 3 to 6 months of household income. But for retirees (in an ideal world) 1 to 3 years of living expenses should be set aside in cash.

Even though your emergency fund cannot cover everything, it can still reduce the money you have to borrow from your family or use credit cards and increase your debt.

The beginning of the year is a great time to put aside extra money into your emergency fund.

Goals for an emergency fund:

Figure out how much you need in your emergency fund.
Create a separate account (money market account, bank savings account, certificate of deposit.
Set up automatic transfers to your emergency fund each month.

4. Create a retirement budget.

Creating a retirement budget, along with a strategy of how you will draw money from your retirement funds is an excellent New Year’s resolution for many baby boomers.

Start by setting up a budget using the amount of money you will have when you retire plus a Social Security paycheck. Do not forget the emergency expenses like home maintenance, car repairs, and medical bills. See if you can live on that budget.

If you cannot, you need to come up with another plan. Think about downsizing if you are a homeowner or relocating to a more affordable area so you can put that extra money into retirement savings.

Think about how much you want to save and how much to spend in 2023. Sticking to your budget can help to know where your money is going. If you want to save more money for your upcoming retirement, begin eliminating some expenses that may not be important to you anymore.

When you retire, you do not need a lot of things that you did when you were working. The costs of commute, take-out lunches and business clothes will go down. On the other hand, you will start spending more money on travel, hobbies, and activities.

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Goals for retirement budget:

Identify your potential retirement income.
Calculate your future retirement expenses by looking at your current costs of living.
Budget with your spouse or partner.
Calculate your net worth.

5. Reduce your expenses.

One of the simplest parts of your financial life to control is spending.

The beginning of the year is a great time to look at your personal spending and set up new goals. 2022 has been full of change and adjustment with many people preferred to work remote. There is a good chance that your spending habits have changed as well.

How did you do last year? Did you get a full picture of your finances and know how much money you have saved (or not) in 2022?

If you struggled last year, decide how to improve your financial situation in 2023.

Look at your credit card and bank statements and see what expenses could be avoided last year, and plan to cut them this year.

Keep in mind, that balancing your income with your spending is the key to saving more money for retirement.

Goals for reducing your expenses before retirement:

Find ways to reduce transportation costs.
Pay off your mortgage or reduce housing costs by downsizing.
Eliminate high-interest debt – credit cards, personal loans, student loans.
Evaluate your insurance coverage.
Figure out where you will live in retirement.

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6. Manage your overall stress and focus on happiness.

We all know that financial stress is not good for our health. Financial anxiety negatively impacts not only our health, but our mood, home and social life, marriage, and ability to pursue our dreams and passions.

Unfortunately, in the current economic climate, it is unlikely that our financial difficulties will disappear overnight. However, it does not mean we have to give up. Perhaps, we need to take small steps to ease our stress levels and focus on happiness and not money.

Everyone’s dream is to have a happy family and be financially secure. So, if you want to be happy and have a secure retirement, try to:

Stop accumulating stuff – Spending money on accumulating stuff does not bring happiness and might put you in debt. Downsize and de-clutter your home, so you can spend more time enjoying your life rather than maintaining it.

Think about experiences – It is a proven fact that you are happier when you spend your money on experiences than on stuff. Accumulating more stuff does not make you happy but doing interesting things do.

Focus on your priorities – Know what is important to you and stop worrying about the rest.

Express gratitude – Be grateful for the good things in your life. It is easy to focus all your attention on the negatives when you are overwhelmed by financial uncertainty and money worries. While you do not have to ignore reality, you can be grateful for many small things in your life. Take a moment to appreciate the beauty of the sunset, flowers in your garden, a gorgeous sunny day, or just a good book.

Find ways to be kind and to help others. These efforts help you see beyond your own financial problems to give something back to the world.

Have you thought about your 2023 resolutions yet? Do you have any financial goals?

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2022 Year-End Retirement Planning Checklist

by Maggie Leave a Comment

three women at the table-year-end retirement plan checklist

It is hard to believe that the new year 2023 is around the corner!

I do not know about you but I cannot wait! Financially, 2022 was a challenging year. According to Goldman Sachs, ‘2022 is likely to end up as the sixth-most volatile year since the Great Depression’. The volatile stock market and the daily reminders of high inflation and rising prices on everything will likely make you worried about the cost of your future retirement.

But the most important lesson I learned over the past years, including the global pandemic, is that there are rewards to being prepared. I truly believe that the year-end retirement planning checklist is a great way to look back at 2022 and make sure you are on the right path to achieve your retirement goals in 2023.

Below is a helpful list of 10 tasks to complete before 2022 comes to a close.

1. Create financial goals for the next year.

Do you know how much money you need to retire? What are you going to do about rising inflation? How is it going to affect your retirement income?

How much will it cost to help your parent’s long-term care needs, pay for your healthcare in retirement, or pay for the vacation you really want?

Maybe none of that applies to you today but you want to know how to project into the future. It is important that you know how much you will need to live the life you want in retirement.

What other financial goals do you have?

2. Set a target retirement age.

Retirement is the one common financial goal we all share. We all need to plan for the day when we can no longer work or are just ready to retire.

The target date is the year closest to the year you plan to retire. Age 65 used to be the magic number, the age at which most people retire. Yet that golden age has changed. Many people are working longer. Even though they may want to retire, it is not always possible because they do not have enough money to retire.

Take some time to set a realistic target retirement date. Based on your estimated retirement income and expenses, you can plan your own retirement strategy.

Looking at your target retirement date and retirement income, you can determine if you have enough money saved for the next 20 to 30 years. If it is not enough for a comfortable retirement, move the date and save more in your retirement funds.

Just remember that where you live and how much you can afford to spend in retirement will impact your retirement lifestyle.

How Do I Decide When Best to Retire?

3. Look at your spending.

The end of the year is a great time to look at your personal spending and see where your money is going. This year has been full of change and adjustment. With many people working remotely, there is a good chance your spending habits have changed as well.

How did you do this year? Have you tracked your spending against your budget? Did you get a full picture of your finances and know how much money you have saved (or not) in 2022?

If you have struggled this year, decide how to improve your financial situation for the next year. Are there debts you should be making a priority to pay off? Look at your budget and decide if there were parts that were difficult to stick to.

Look at your credit card and bank statements and see what expenses could be avoided this year. Then set up a budget for the next year and decide on how much money you need to save in 2023 to meet your retirement goals.

4. Get a clear picture of your spending in retirement.

Do you know how are you going to pay for your retirement years?

First, think about your current overall cost of living. Then, think about if you have enough income to sustain your current lifestyle in retirement?

Calculate how much is your nest egg.

When you are near retirement, it is important to know how much money you will need to live comfortably for the rest of your life.

If you still have no idea how much money you will need, look at your current expenses and then evaluate how they might change in the future.

When you retire, you do not need a lot of things that you did when you were working. Generally, the costs of commuting, take-out lunches, and business clothes will go down. However, you might start spending more money on travel, hobbies, and activities.

Calculating your nest egg is easy if you already have a budget and know how much you spend now. The next step is to get a clear picture of how it might change in the future based on your retirement lifestyle.

Retirement Budget in 5 Simple Steps

Another option to figure out how much money you need to retire is to replace 70 to 80 percent of your annual pre-retirement income. For example, if you earn $70,000 per year before retirement, you should expect to live off $49,000 to $56,000 per year.

5. Review the source of your retirement income.

In my year-end review, I always find time to look at our future retirement income.

I usually look at our current Social Security, retirement, and investment funds statements to get a clear picture of our potential retirement income. I wanted to make sure that we are on track to our retirement goals and have enough money to cover our living expenses when we stop working.

When you are working, you typically have a single employer and a single source of income – your salary. In retirement, everyone has different sources of income – Social Security, pension, part-time job, investments, and retirement savings (401k, IRA, Roth IRA, Roth 401k).

To make your assets last through the next 20 or 30 years, use the rule of thumb to withdraw 4 percent of your retirement money annually. For example, if you have $500,000 in retirement funds, you can spend roughly $20,000 ($500,000 x 0.04) per year when you retire. Add this number to your Social Security, pension, and other savings, and calculate if it is enough to support the retirement of your dreams.

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6. Check your progress on paying down debt.

The end of the year is a great time to sit down and check your progress on paying down debt.

Ideally, you should be entering the retirement debt-free, but in the real world that is not always achievable. So, it may be okay for you to retire before you pay off your big debt like a mortgage, cars, and student loans.

Just make sure you understand the implications of retiring with debt because big withdrawals from retirement funds could push you into a higher tax bracket.

Yet, if you have several years before retirement, try to reduce your debt so you will have more money available for your lifestyle in retirement.

Pay off all credit cards and personal loan debt.

When it comes to debt, plan to pay off high-interest rates debt first. Credit card APRs have increased this year with the average rate around 19 percent. A credit card debt has become the most expensive debt for many people.

By reducing the existing debt and limiting new debt you can minimize the amount of retirement income that you will spend on interest payments. For example, if your monthly retirement budget includes a $350 car payment and a $700 credit card payment, you will obviously be able to spend $1,050 a month less than someone without those bills.

If you pay off a credit card that charges 19 percent interest, it’s like earning 19 percent on a risk-free investment.

Your mortgage.

Once, you paid off your credit card debt, start planning on paying off your mortgage. If you have a low-interest rate, you can plan to pay off the mortgage early by making “extra” mortgage payments each month.

With a mortgage paid off before retirement, you will have the extra money you need to travel in style or spoil your grandkids for years to come. Just remember that taking large withdrawals from your retirement accounts to pay off your mortgage could throw you into a higher tax bracket.

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7. Review your savings progress.

typewriter - year-end retirement planning goals

Did you spend less money this year due to the fear of covid? Did you spend less money on eating out, vacations, or concerts? Did you buy less gas because you worked remotely?

If yes, stash those funds into retirement savings. If you are still working, try to boost your savings rate. It is never too late to increase the size of your nest egg. If you are in your early 50s, you still have close to 15 years of working to save for your retirement.

You should save at least 15 percent of your gross income in retirement accounts such as 401(k), IRA, Roth IRA, or Roth 401(k).

A key factor in any retirement plan is having enough savings to last for the next 20 to 30 years.

8. Check your readiness for unexpected expenses.

Another important key factor in any solid financial plan is having enough savings to fall back on during emergency. To be prepared, put it on your checklist to have two funds – a rainy-day fund and an emergency fund.

Typically, a rainy-day fund is smaller, up to $2,500 for smaller expenses. An emergency fund can be as much as 9 or 12 months of living expenses – $10,000 to $50,000 or more depending on your expenses.

Whichever way you build your financial cushion, be sure you do it. There is no better way to have peace of mind than knowing you have funds to cover expenses when you need them.

9. Review your asset allocation and simplify your portfolio.

As you are getting closer to retirement, it is important to have a clear and accurate picture of your complete investment portfolio.

If your portfolio is spread out among several investment companies, it will become difficult to keep track of all that information. Think about consolidating all your accounts in one place like Vanguard. So, you will get simplified reporting, low costs, and low fees.

The financial markets have fallen sharply this year. Take the opportunity to review your asset allocation and make sure your portfolio is diversified and invested for growth. You should have a mix of stocks, bonds, mutual funds, and other assets that fits your retirement goals.

It can be tempting to stay away from stocks to reduce the risk of losing money in your retirement funds. But stocks provide growth and investing for growth is important. If you retire at 65 and spend 20 years in retirement, you need to have enough growth in your portfolio to make money last that long.

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10. Keep will and trusts up to date.

Another important part of your year-end retirement checklist is the status of your will and/ or revocable living trust.

Keep them up to date and make sure you have suitable executors, trustees, and guardians in place. Additionally, you will want to make sure your list of beneficiaries is up to date as well. If you have welcomed a grandchild to the family do not forget to add his/her name to the list. Also, if there has been a change in the family such as a marriage, divorce, or death, make sure to update your beneficiary list.

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How to Retire Well on a Small Budget

by Maggie 4 Comments

an older couple in woods-retire well on a small budget

The truth is a lot of retirees will be living on a small budget. According to U.S. Census Bureau data, the median average retirement income in 2021 for retirees 65 and older is $47,357.

And the average retirement savings for people aged 55 to 64 is $375,000. For most people, these savings will decrease when they start spending them in retirement.

With not that much money in your pocket, retirement is getting more difficult than ever with the growth of inflation and just about everything getting more expensive.

Living well on a small budget in retirement can be challenging, but it is possible. There are a few things you can do to make it work.

Pay attention to your spending.

When you have to live on a small budget in retirement it is important to know where your money is going. Not many of us like to spend time tracking our expenses. But you cannot afford to slip money away on something that is not important while living on a tight budget. Every dollar should be accounted for.

Here are the biggest expenses in retirement – housing, transportation, food, and healthcare.

Take a careful look at your expenses and see how you tend to spend money each month. Divide all your expenses between fixed and variable and see where you can cut back.

Fixed expenses such as mortgage/ rent, utility bills, and car insurance are set and hard to change. However, variable expenses such as clothing, dining out, travel, and entertainment are easy to reduce.

How to Cut Expenses Before You Retire

There are many budgeting apps that make tracking your spending easier than it used to be.

Best Budgeting Apps

Reduce your housing costs.

Keeping a roof over your head is always one of your biggest budget items. But how much money you can spend on housing is critical when you have to live on a limited budget.

Luckily, we have many options to choose from:

Downsize to a smaller home or condo
Move to a cheaper location
Rent an apartment
Relocate to 55+ community
Age in Place

First, think about where to live in retirement and the monthly costs of that place including rent or mortgage, taxes, maintenance, and repairs.

Second, decide how close you want to live to your family and friends and what your other priorities such as climate, rural or urban areas, and proximity to medical facilities.

Third, if you choose to age in your home, figure out the cost of renovation for retiring in place and how much help you will need for maintaining that big house when you are older.

Choose your place to live in retirement carefully because it is your biggest budget expense.

5 Common Mistakes to Avoid When Choosing a Place for Retirement

Reduce your transportation costs.

Cars are expensive. You do not need to spend a lot of money on your car to have a happy retirement.

Typically, most retirees spend less time on the road driving than the average driver. According to stats, people over age 65 spent an average of $7,062 annually or $588.50 per month on transportation.

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

If you have been a two-car family for years, it is time to downsize to one car so you can spend less money on insurance, gas, maintenance, and taxes. And if it is time to replace your old car, do not buy a new car. Consider buying something that is about 2 or 3 years old so you can pay less.

Most vehicles lose about half of their value by the time they are five years old. So, if you decide to buy a used car, a three-year-old car will cost you less in upfront expenses and maintenance.

In case you are planning to move from the suburbs to the city, you should sell all your cars and take advantage of public transportation. In this scenario, you do not need to worry about the costs of your vehicles at all. Buses, subways, and other public transportation can cost you around $526.80 per year with a senior discount. Just buy a monthly public transportation pass and enjoy car-free retirement.

Reduce your food costs.

Food is going to be your third biggest expense in retirement after housing and transportation.

On average most retirees spend around 20 percent of their income on food. According to stats, in the last 5years households run by people 65 or older spent $6,207 annually or $517.23 monthly on food. Those aged 65 to 74 spent on food $6,864 per year, and people over 75 spent $5,274. These food expenses include groceries, alcohol, and dining out.

Food costs will vary depending on your diet and habits. For example, people who prefer to buy organic produce will likely spend more money than people who do not.

If you are retiring on a small budget, you need to be creative with your food and how you eat.

Learn to cook

Eating at home more frequently will cost less than eating out. The reality is that the food you cook yourself is the cheapest food you eat. When you retire and have plenty of time there is no more excuse such as “I do not have time to cook”. After all, learning how to cook can become your new hobby.

person holding sliced veggies - retire well on a small budget

Plan meals in advance

I noticed that frequent trips for a few extra grocery items often lead to a higher food bill at the end of each month. That is why planning your meals in advance before you go grocery shopping is important.

For example, use a Monday morning to decide what dishes you want to cook at home during the coming week and additional snacks you will want to have in your pantry. After making a list, you can go grocery shopping just once for the whole week.

With current prices skyrocketing and inflation on a rise, it is getting tougher to find new ways to save on grocery shopping.

However, there are always ways to shop smart:

Shop seasonal food. Seasonal food is cheaper since there are no traveling and storage expenses involved. Purchasing seasonal produce is always cheaper than buying that same fruit or vegetable during its off-season. In addition to that, produce is fresher and tastes better in season, and is often perfectly ripe. So, take advantage of the low prices at harvest time.
Shop generic brands. The huge benefit of buying generic brands instead of name brands is saving money. Typically, generic brands are cheaper than name brands. The packaging may not be as colorful as a name-brand product, but often there is little to no difference between both products.
Shop the perimeters. Fresh foods are healthier than processed foods. In a typical grocery store layout, fresh foods such as fruits and vegetables, meat and fish, milk, eggs, and cheese are on the outside perimeter. But processed foods are typically stored in the center aisles.

Many foods in the center aisles contain preservatives that make them last longer on the shelf. If foods do not have any added preservatives, then it needs to be refrigerated to keep them fresh.

Try to avoid buying pre-cooked meals or processed foods to maintain a healthy diet and cut the costs of your groceries.

Learn to eat out for less

Cooking only for one or two seems unrewarding. However, if you are living on a tight budget, you should avoid eating out frequently. It is not that you should never eat out. But if you are retired and worried about inflation and rising food prices, reducing the number of times you go to the restaurant can help to reduce the cost of it.

There are still many ways to have the restaurant experience on a small budget:

Have your meal at home and then go for coffee and dessert.
Instead of eating out dinner, go to the same restaurant for lunch. Many restaurants have the same menu for lunch and dinner, but they mark up their prices for dinner.
Instead of eating out once a week, start eating out only once a month.
If you still want to go to an expensive restaurant, avoid ordering appetizers, alcohol, and dessert to save money on the highest price increase items.
Be selective, look for coupons or Groupons, and only go to places offering deals and discounts.
Go to happy hours at restaurants, where wine and hard liquor are less expensive, and the bar food can serve as dinner.

Check out this website for Restaurant Deals and Specials

Sign up for Groupon to receive coupons and discounts

Take care of health to reduce medical costs.

We all know that medical care is expensive, and the cost of healthcare is rising every year. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2022 may need approximately $315, 000 saved (after tax) to cover healthcare costs in retirement.

Many health issues are age-related. Our body gets weaker as we age.

There are still many retirees who spend days lying on a couch watching TV and snacking. Some people gain weight when they stop working because they are not active and eat more because they are bored. Being overweight and lack of exercise put retirees at great risk of many chronic diseases such as diabetes, stroke, and cancer.

That is why regular medical check-ups are a must.

You should visit your doctor regularly and do not skip any recommended health screenings and tests. Keep an eye on your blood pressure and cholesterol level to avoid a heart attack or stroke.

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

Another way to keep your medical expenses down is to stay active and fit. Start with developing good habits in your new life. Create an exercise routine and follow it thoroughly.

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

How to Stay Fit for a Healthy Retirement

Travel and entertainment on a small budget.

One of the most exciting parts of retirement is enjoying your new lifestyle.

Portugal coast - travel on a small budget in retirement

For many retirees, travel is a big part of that lifestyle. However, traveling is expensive. It includes hotels, air tickets, restaurant meals, rental cars, entertainment, tours, and more. According to stats, the average retiree spends $11,077 per year on travel.

Travel off-season. If you want to travel on a small budget, look for travel deals or travel off-season. In retirement, it is much easier to save money on travel because you have the freedom to travel when the best deals are available.

Find cheap accommodations. Instead of paying a lot of money for the hotels, look at websites like Airbnb, VRBO, or Vacation Rentals to see what they have to offer at your destination.

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

Look for senior discounts. Many museums offer free days or evenings for visitors. When you do not have to work, it is much easier to visit museums on a weekday with a smaller crowd. Also, you can ask for a senior discount at museums, concerts, parks, and other tourist attractions. With available discounts and deals, you can save a lot of money and travel for less.

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

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

Retirement Travel Tips for Planning a Vacation

Final Thoughts

It is good to remember that money and wealth are important, but it is not everything. Happiness is not about being able to purchase a fancy car, a big house, or indulge yourself in luxury vacations. It is small and simple things such as family, friends, and having a purpose in life that make us happy.

How do retirees manage to live on a small budget? Share your ideas in the comments below.

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Should I Pay Off a Mortgage Before Retirement?

by Maggie 2 Comments

woman holding for sale sign - pay off a mortgage before retirement

For many of us, the mortgage debt is the largest in our budgets. That is why entering retirement debt-free seems ideal for many people.

Getting rid of a big debt could save you thousands of dollars in interest and free up money you can add to your retirement savings or just reduce your expenses in retirement.

It is my dream to pay off our mortgage before we retire. But I do not think it is possible. And I am not alone. According to stats, more and more people retire owing money on their homes. The Federal Reserve’s Survey of Consumer Finances showed that 37.6% of households of people aged 65 to 74 had a mortgage in 2019.

We all know that it can take decades to pay off your mortgage. But does it always make sense to pay off a mortgage before you retire?

Reasons to consider paying off your mortgage before retirement.

There are many reasons to consider when deciding should I pay off my mortgage before retirement or not:

You may be able to retire sooner.
You will have one less bill to pay each month in retirement.
It will provide you with more income in retirement.
Paying off a mortgage before retirement can reduce stress.

Also, it makes sense to pay off a mortgage before retirement:

If the house is worth more than the mortgage balance.
If the interest rate on your mortgage is higher than the rate of return on your investments.

Here is a related post you might want to read:

How to Use a Home Equity in Retirement

Benefits of paying off your mortgage before retirement.

Most people would be better off not having a mortgage in retirement. Getting into retirement with an unpaid mortgage will put a burden on your lifestyle.

When you are working, you have years of earned income to pay off a mortgage. But once you retire, you will be living on a fixed income. And when you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, large withdrawals from retirement funds could push you into a higher tax bracket.

Frankly, it will make your retirement life a lot harder if you must continue to pay a mortgage when you are not working. In addition to that, you still have to spend money on property taxes, homeowner’s insurance, maintenance, and repairs.

The simple fact that you have lower housing costs means you will need less income to cover this essential expense. Also, you will have more retirement income left for other retirement expenses.

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

Roman and I refinanced our house many times. But even with a low-interest rate of 2.5 percent, the mortgage payments take the biggest chunk of our budget.

Here is a list of benefits of paying off your mortgage before you retire:

Give you peace of mind
Provide you a place to live without worrying about monthly payments
Reduce your retirement expenses
Saving you money on interest

How to pay off your mortgage before retirement:

Refinance to a shorter-term loan. One way to pay off your mortgage faster is to refinance to a shorter loan term. For example, you can apply for refinancing your mortgage from a 30-year to a 15-year loan. That can put you on the fast track to paying off your mortgage.

However, it is important to remember that a shorter-term loan means higher monthly payments. Make sure your budget can handle the higher payments each month.

Refinance to a lower interest rate. Another smart option to reduce your mortgage debt is refinance it at a lower rate. In 2020 Roman and I refinanced our mortgage with Ameri Save Mortgage Corporation at 2.5 percent. It helps us bring down our monthly payments and save up to $500 a month.

Make an extra payment each month or each quarter. Look at your mortgage balance and figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly.

Making an extra payment 4 times in one year could remove 10 years from your payoff date.

Every dollar you pay above your regular monthly payment helps speed up your payoff date. It does not mean that you have to start doubling up your monthly payments. Simply adding an extra $100 a month to the principal can speed up your payoff date for 5 years.

Switch to bi-weekly payments. Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments.

When you switch to a bi-weekly mortgage payments program, you split your payment in half and pay twice each month. There are 52 weeks in a year. If you switch to bi-weekly payments, you end up making 26 payments which are equal to 13 monthly mortgage payments – one extra payment yearly.

With this strategy, you will be able to knock off a few years of your mortgage balance and reduce the amount of interest you pay on the loan.

Put extra cash towards your mortgage. Whether it’s a bonus, tax refund, salary raise, or inheritance, put every dollar towards paying down your mortgage debt.

Reasons not to pay off your mortgage before you retire.

Rushing to pay off your mortgage before retirement may not be a good idea for many reasons:

Paying off your mortgage early could trigger a penalty
You may be better off investing the money
You may need to borrow against your home equity later
You will be paying off your mortgage with savings

Tax benefits. Your mortgage interest is tax-deductible.

If you are still working and in the 35% tax bracket, every dollar you pay in mortgage interest saves you 35 cents in federal income taxes. Also, you save money on state income taxes.

A mortgage is a low-cost debt. A mortgage is one of the least expensive loans available.

If you have a credit card debt, it often comes with a higher interest rate than a mortgage. Do not rush to pay off a 2.5 or even 3.5% mortgage if you have credit card loans or other debt you are still paying off at 18 or 20% rates.

It is better to save for retirement than pay off a mortgage. As I mentioned above, mortgages are often the cheapest money you will ever be able to borrow.

Typically, mortgages have a lower rate and even fixed-rate, helping to ensure that borrowed money remains cheap for the next 15 or 30 years. That means people have the opportunity to put funds elsewhere, such as in savings and retirement accounts.

Thanks to compound interest, a dollar you save and invest today has more value than a dollar you invest 5 or 10 years from now. That is because your invested money will be earning interest on top of interest for a long time. For that reason, it makes more sense to start saving for retirement when you are younger rather than focus on paying off your mortgage.

What to do if you cannot pay off your mortgage before retirement?

Unfortunately, not everyone can pay off a mortgage. Retiring with mortgage debt is becoming a more common scenario.

person holding a house keys - benefits of paying off mortgage before retirement

To pay off a mortgage before retirement might not be realistic for everyone. If you are like me and worry about how to afford mortgage payments in retirement, there are several options to consider:

Downsizing. Your home is one of the biggest investments.

If you have been living there for a long time, your home went up in price and accumulated a lot of equity. One of the ways to get rid of mortgage payments and home maintenance bills is to sell the house.

If you cannot afford to pay off your mortgage, you might consider selling your home. You can sell the big house and trade it down for a smaller house or a condo. Or you can move to a cheaper area and pay cash for your new house.

Invest equity. Do you want to deal with the hassle of homeownership in retirement?

Maybe you rather spend time traveling and visiting family and friends. In this case, your option will be to sell your home, invest cash, and enjoy living on rent and mortgage-free.

Investing the cash from home sales will bring you additional income in retirement. If you let it grow for 10 years in your investment portfolio, and it might be enough to pay cash for your next house or a condo if you are tired of renting.

But 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, homeownership might provide several options to fund your retirement without the risk of stock market investments.

In this case, consider a reverse mortgage. Those people who have big equity built up in their homes could apply for a reverse mortgage. This type of loan can be also used to pay off the existing mortgage.

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 you to move out. But the loan has to be repaid when the owner sells the house, moves out, or dies.

A reverse mortgage can be flexible, and you can take HECM as a line of credit (HELOC), lump sum, or 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.

However, 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.

Your Guide to Reverse Mortgages

Should you pay off your mortgage before retirement if you could? Share your thoughts in the comments below.

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