Retirement Expenses

7 Simple Ways to Pay Yourself in Retirement

man and woman at the laptop - retirement income plan

We all have our dreams of retirement. But whether you plan to travel the world or just enjoy the freedom of doing nothing, we all have one thing in common – figuring out how to pay for our life in retirement.

Perhaps the biggest challenge of transitioning from work to retirement is learning to live without a regular paycheck.

Instead of receiving a steady income from the employer you suddenly find yourself dependent on Social Security, a pension (if you are lucky), your investments and savings. But as Social Security dwindles and pensions become a rare commodity, it is more challenging to build a dependable and consistent retirement income that meets all your needs.

After decades of earning income and saving for retirement, you finally need to shift gears and learn how to spend what you have saved.

In this post, we look at Suze Orman, America’s most recognized financial guru, recommendations on how to pay yourself in retirement and not run out of money.

1. Know your living expenses.

This sounds so basic, but most people do not know what they really spend each month.

You might have a good idea of how much you spend on mortgage/ rent, utilities, cars, and groceries. But you forget to add occasional trips, gifts, gym membership, eating out, etc. All these expenses can drain your money fast.

In her book, The Ultimate Retirement Guide for 50+ Suze Orman recommends calculating everything from major costs such as mortgage payments, utilities, transportation and groceries to smaller purchases like clothes, accessories, and entertainment.

The best way to do it is to create a list of your living cost categories and calculate your monthly spending.

If you want to automate calculations and track your expenses use the technology. A good quality budgeting app will track your expenses for you and save you time.

Best Budgeting Apps from Forbes Advisor

2. Calculate your reliable retirement income.

This one is a very important calculation and is not always easy to figure out.

But you need to calculate all sources of your retirement income to get a clear picture of how much money you will have coming in.

There are three building blocks to your retirement income:

Social Security benefits
Pension income (if you are eligible)
Income from your investments

Social Security benefits and pensions are considered guaranteed income and it’s easy to calculate.

Go to the Social Security Estimator to find out your calculated benefits depending on the age you start collecting.

But to secure a dependable income from your investments can be tricky because you will be at the mercy of market fluctuations.

You can still create a retirement paycheck from bond and dividend payments investments. However, there are several drawbacks to interest and dividend investing. First, many retirees cannot live on interests and dividends alone. Second, dividends are never guaranteed. During difficult economic times, some companies choose to cut or eliminate their dividends.

3. Pay your fixed living expenses from guaranteed income.

Your retirement income plan should be built on the common sense of stability.

The stability you want should allow you to pay all your essential living costs no matter what. If the markets are going down, you want to know that you have enough income to cover your basic living expenses.

There are three types of retirement guaranteed income:

Social Security
A pension
An income annuity you purchase yourself.

Guaranteed income means that these income sources are set and will not go up or down with financial market changes.

Your goal should be to cover all your essential living expenses from these guaranteed income sources.

Here is a list of essential living expenses:

Mortgage/ rent
Utilities
Transportation
Groceries
Medical insurance

An income annuity (fixed income annuity) is a personal pension you create for yourself.

You can purchase an annuity from the insurance company in exchange for an agreement to send you a locked-in payment every month once your annuity starts.

Keep in mind that any type of annuity is an expensive insurance product. And if you buy an income annuity, the money you pay the insurer is no longer yours.

Here is the list of income annuities to consider:

Immediate income annuities. You pay your one-time premium to the insurance company, and payments start immediately.
Deferred income annuities. You buy the annuity today, but do not start the payouts until a set period of time, such as 5 years or 10 years.

But if you place a high value on having a guaranteed income, you should consider adding an income annuity to your other sources of guaranteed income such as Social Security and/or pension.

Retirement Annuities: Know the Pros and Cons

4. Keep at least two years of living expenses in cash.

Every household needs an emergency fund that can cover up to 6 months of their living expenses or even longer.

According to Suze Orman’s advice you need to have a separate bear-market emergency fund in retirement.

This fund should have at least 2 years of living expenses in it. If you expect that you will not cover all your living expenses from guaranteed income, then she recommends keeping 3 years of expenses in safe accounts. And this fund is in addition to your typical 6 to 8 months emergency fund.

Emergency cash fund gives the flexibility you need to handle financial markets downturn. This fund is also where you get the money to pay for out-of-pocket medical expenses if it is unexpected.

In her book, she recommends creating this bucket of cash from your bond portfolio.

For example, if you have $500,000 in investments, it should be split into $250,000 in stocks and $250,000 in bonds. Let’s assume your annual living costs are $35,000. You should move at least $70,000 (two years of living expenses) of your bond portfolio into savings accounts, CDs, or short-term bonds.

This fund is a helpful alternative to instead of selling stocks for a loss or taking a high-interest personal loan for an emergency.

5. Hatch an RMD plan.

RMD stands for required minimum distributions – the minimum amount of money retirees must withdraw from their retirement accounts when they reach a certain age.

If you have savings in tax-deferred retirement accounts such as 401 (k) and IRA, the federal government is going to force you to start taking money out each year.

Even though you do not need the financial needs to touch these accounts, you still must start making annual withdrawals. Neglecting to withdraw money on time can cost you thousands of dollars in penalty fees.

Just because you must take withdrawals from your retirement accounts, that does not mean you should spend all of it. After you pay the IRS their tax, do with your distribution what you want even consider reinvesting some of your RMDs in a regular taxable account.

And do not worry you do not need to do the RMD calculation yourself. The company where you have your IRAs and 401(k)s invested will calculate your RMD for you.

6. Plan to spend no more than 3% of your portfolio in your first year of retirement.

Most of us closer to retirement are familiar with a popular 4% rule for retirement spending.

The 4% rule says that you should be able to comfortably live off 4% of your retirement savings. For example, if you have $1 million you would withdraw no more than $40,000 in your first year of retirement based on the 4% rule.

Keep in mind that you should adjust that amount each year by the rate of inflation.

However, Suze Orman recommends spending no more than 3% of your portfolio in your first year of retirement.

For example, if you have $1 million you would withdraw no more than $30,000 in your first year of retirement. Even though your RMD will be higher than 3%, she recommends spending just 3%.

The most important factor to consider is whether you retire in a bull market or a bear market.

If you have the misfortune of retiring in a bear market, you should be spending as little as possible of your portfolio. Taking money out in a bear market leaves your accounts depleted. By scaling back your withdrawals you will give your money time to recover.

7. Stay Flexible.

The most important part of your retirement income plan is to stay flexible as your life situation changes and modify your plan with time.

You can still retire at 65 but you can delay retirement to increase your Social Security benefits. Also, think about picking up a side hustle or a light part-time job to supplement your guaranteed income and maintain your retirement lifestyle. Consider these options when working on your retirement income plan.

Also, you can always plan on spending less to make retirement more affordable.

Maybe you should postpone a luxury cruise vacation or trim your monthly dining-out habits. Maybe you should reduce cash gifts to your kids and grandkids or consider downsizing your home to save thousands of dollars on housing costs.

But whatever you do, keep your retirement plans realistic.

The final words of advice – it is never too late to start finalizing your retirement plans and calculations. The earlier you start, the better prepared you will be.

Here are a few related posts you might want to read:

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8 Budget Categories You’ll Likely Spend More in Retirement

by Maggie Leave a Comment

cruise ship - budget categories to increase in retirement

Many of us have big plans for our retirement including traveling the world, moving to another country or state, learning new hobbies, and reading every book.

But if you add those big plans to increased free time, reduced income, skyrocketing medical bills, and other emergency expenses associated with aging it will be hard to assume that we will spend less in retirement.

Our prospects to avoid outliving our nest egg significantly depends on our retirement expenses. It is really hard to predict how much we will actually spend on housing and health care when we retire. But we still have lots of other options for saving money and should not fall into the trap of overspending.

Here are 8 budget categories where you’ll likely spend more in retirement:

1. Travel and Vacations

Travel is the number one spending category on most retirees’ budget lists.

Many people are looking forward to doing all the traveling because they never had enough vacation time while working. It is so exciting to kick back and make big travel plans for your retirement bucket list.

But it can be so easy to overspend on travel and long vacations. You worked hard all your life, so you feel you deserve that 2 weeks of luxury cruise vacation or spend time in Paris. Compared with their working years, many baby boomers like to take longer cruises or cruises that visit more destinations.

But you may find yourself spending more on travel in retirement than your budget can afford it.

To make your dreams more affordable:

Take advantage of the last-minute deals
Travel during off-peak seasons
Ask for senior and AARP discounts.

2. Medical expenses

It probably doesn’t come as a big surprise that we spend more on medical care as we grow older.

Healthcare costs will be one of the top expenses that most retirees have to deal with. Unfortunately, medical care costs will keep increasing as we age.

The Employee Benefit Research Institute published their study that the percentage of a household’s total spending on health care increases from 8% in preretirement households to 19% by the time a household is past the age of 85.

For the average family, the unpredictable and costly new diagnosis can create an increase in healthcare spending. Also, overall spending on health insurance premiums, prescription drugs, medical supplies, and medical services will go up.

How to save money on medical expenses?

In addition to having the best available medical insurance, the best way to save money on medications is to use generic versions of drugs rather than the name brand.

Also, you can save money by shopping around at your local pharmacies, comparing costs online, or ordering in bulk by mail. Depending on the type and amount of medication you need, the savings could be thousands of dollars for your budget.

3. Fitness

Fitness is one of the new biggest expenses that many retirees spend money on.

According to statistics, approximately 53% of retired Americans participate in physical activity and allocate about 13% of their annual spending to fitness and leisure activities.

Retirement serves as a motivator to get fit. With more time on their hands, people start exercising more and spending money on gym memberships and fitness classes.

Also, the fear of declining health as we age motivates us to take fitness seriously. Many retirees choose to drop unhealthy habits such as drinking and smoking and pick up healthier ones.

4. Moving and Relocating

Many empty nesters start thinking about downsizing. With the kids gone, you might find it hard to keep living in 4 bedrooms house that feels too big and empty for you.

Downsizing a big home for a smaller house or condo comes as a smart strategy to save money in the long run. But the moving and relocating process can set you back thousands of dollars.

Overall, moving can be a stressful experience. Sorting through your belongings, packing, and cleaning can be overwhelming. In addition to that, high inflation will make your moving costs increase significantly.

Everything involved in a move will cost you more – movers, truck rentals, supplies, storage, etc. In addition to downsizing your home, you will need to downsize and replace your furniture – replacing a big sofa and club chairs with a smaller couch, a king-size bed with a queen-size bed, or a big dining table with a smaller kitchen-size set.

5. Vacation Home

Many baby boomers think about downsizing or moving to a different location. Others looking at the option of buying a second home to use it as a vacation home.

couple walking on a beach - buy vacation home in retirement

If you have set yourself up financially well for retirement, it can be tempting to splurge on a luxury home in a place you have always dreamed of. But in many ways, this will result in overspending.

The responsibilities of homeownership are similar for your vacation home as your primary residence. You need to consider the costs of your monthly mortgage payments, routine repairs, furniture, appliances, etc. It’s important to consider whether you are financially ready to take on these extra costs without depleting your savings and running out of money fast.

It is common for baby boomers to purchase a vacation home in a different location than their primary residence. It makes sense to choose a home in your favorite vacation destination or area with a different climate.

But it is easy to forget that the cost of living can be higher in these locations. That is why it is critical to understand the cost of living and property laws in your new location before making a final decision.

6. Utilities and Household Help

If you noticed that your utilities went up due to the inflation and working remotely, welcome to another reality of retirement.

According to the studies, the average retired household spends more each year on utilities than the average working household. It’s rather simple. Retirees spend more time at home, so they are using more utilities.

When you retire, you will see a bump in your bills such as gas, electricity, water and sewer, cable, and streaming devices because they will be used more often.

As you age, you may need to hire household and maintenance help more often than before. Maybe you do not need that help right now, but as you grow older, you will need help with raking leaves, shoveling snow, cleaning roof gutters, mowing lawns, etc.

If you want to age in place, you can get any type of personal care, household help, and services in your home which comes with a price.

According to estimates from Genworth (Financial Solutions for Long-Term Care), the median cost of hiring a home health aide is approximately $5,000 a month. And a medical response system, which is usually based on a monthly subscription, can be as much as $90 each month.

Aging in Place: Growing Older at Home

7. Groceries

It is so easy to overspend on groceries because 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. 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.

While you may prefer to shop for groceries in one store, it might be wise to go to different stores. Different stores run promotional sales or offer coupons that can bring the price of your groceries down. Rather than simply buying all your groceries at one store, you can save a lot of money with just a little planning ahead.

Also, 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.

8. Gifts to Family and Charitable Donations

In retirement, many people become generous with gifts to relatives and friends. They feel it rewarding to share the wealth they have accumulated during their lives.

Gifting is certainly a nice gesture that comes with the feeling of being generous. But you have to be careful and not drain your retirement funds by supporting your adult children’s lifestyle or spoiling grandchildren with vacations. One day you may end up in a position where your own lifestyle suffers.

Many retirees spend too much of their income on family and friends, while others donate excessive sums to charities. There is nothing wrong with giving donations to your favorite charity or church. But as much as you believe in generous donations, it might qualify as excessive spending.

It’s a good idea to include money for gifts and donations as a separate category in your retirement budget. If you really want to give more to charity, reduce other portions of your retirement budget such as eating out, entertainment, and expensive vacations.

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

by Maggie 2 Comments

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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