Retirement Expenses

7 Steps for Managing Money in Retirement

Retirement often means big changes in your financial life. Financial priorities will change as you move from saving for retirement to generating reliable income from your retirement savings. Sources of your income will shift, as well as your expenses.

As you plan for retirement, you need to project your life ahead for 20 to 30 years as best as you can. Financial stability is important at any age, and typically it begins with smart money management.

Here are the 7 steps for managing your money in retirement.

Step 1. Determine your budget.

It is important to know how much you will spend in retirement. You will not have the safety of every month’s paycheck to support your expenses. The amount that you spend is extremely critical to how long your money will last in retirement.

You have to be careful and not spend a lot of money early in retirement because it could deplete your resources early. If you deplete your retirement funds early, you may need to cut back later. Or it may mean going back to work when you are older.

A retirement budget is critical because it shows what your income is, what your expenses are, and what amount of money you need to have a comfortable retirement.

You can determine your budget around your needs and wants:

Do you still have a mortgage on your home?
Are you planning to downsize or retire in place?
Are you planning to stay put or relocate in retirement?
Can you move to a more affordable place and save?
Do you plan to reduce your expenses?
Do you plan to travel in retirement?

Your budget should show your retirement income sources such as Social Security, pension, part-time job, and withdrawals from retirement and investment accounts. Most importantly, it shows if you have enough retirement income to pay for rent/ mortgage, utility bills, groceries, transportation, taxes, healthcare, and other costs of living.

Also, you need to be as honest as possible and even add to your budget some extra unforeseen expenses and emergencies like home repairs, car troubles, and unexpected medical procedures.

It is a good idea to start more conservatively with your estimates. It is better to assume that you will spend more than you actually do when you retire, so you will have more flexibility later.

Step 2. Create reliable retirement income.

When you finally retire, you need to figure out how to turn your retirement savings into a consistent retirement income. In fact, studies show that retirees who have guaranteed retirement income are less stressed than retirees who make random withdrawals from their retirement accounts.

What are the guaranteed sources of retirement income?

Social Security and/or pensions are considered the source of a guaranteed retirement income.

An annuity is another source of guaranteed retirement income you have to create yourself. When you buy an annuity, you will turn your retirement savings into a predictable retirement income.

One of the most popular methods of creating a retirement income is to create different money buckets or accounts for different spending needs.

For example,

Near-term income. The first bucket is called a cash bucket and has 2 or 5 years of income in cash reserves. This bucket contains your cash and short-term fixed-income investments that can be easily converted to cash. These are your safe assets that can generate income. High-yield savings accounts can be a good place to keep your money.

As you use money from your first bucket with cash reserves, you will need to replenish it with cash from other buckets.

Mid-term income. The second bucket contains investments that you will need for about 3 to 7 years. The second bucket should have a mixed investment in things like bonds, CDs, and mutual funds. These types of assets will provide income and growth.

Long-term income. The third bucket contains assets that you don’t need to tap for 7 to 10 years. This bucket can provide growth and can be invested in stocks and mutual funds. You have to plan not to touch this bucket for at least 10 years. The goal here is to have a strong ability of solid long-term gains and more time for investments to recover from the ups and downs of the market.

As you manage your money, it is important to keep safety in mind. While you may feel safe keeping all your assets in short-term income investments, you will lose out to inflation over time. Your portfolio needs to have growth. On the other hand, you cannot have all your assets in stocks because of the stock market volatility.

Step 3. Cut back on your expenses.

Once you are retired, there are not so many options to make money. You need to live with what you have. In retirement, every expense needs to be accounted for.

Generally, you cannot avoid expenses like utilities, food, transportation, taxes, healthcare, and rent. But you can manage your discretionary expenses like entertainment, travel, hobbies, and activities with caution. This doesn’t mean you shouldn’t enjoy your retirement years.

But with smart money management, you should pay for them out of retirement savings that are specifically allocated for longer-term goals. Otherwise, you can drain your retirement funds fast and have to go back to work.

When planning for smart money management in retirement, be prepared for spending shifts.

When we first retire, we should expect to spend more because we are still active and like to do lots of things. After that, we enter a period of slowing down and staying closer to home. We should expect to spend less on entertainment, eating out, and traveling.

As we grow older, we need to be prepared for medical spending because our medical expenses will grow every year.

Step 4. Make withdrawals from the right accounts.

When managing money in retirement, every penny counts. That is true when it comes to tax savings.

You must make the most out of your tax-deferred retirement accounts, such as 401(k) and IRA. The longer you give them compound without having to pay tax on the capital gains, the better off you will be.

That is why financial advisors recommend that the order of withdrawal from your accounts should be the following:

Taxable (investment) accounts
Tax-deferred accounts – 401(k), IRA
Tax-free accounts – Roth IRA, Roth 401(k)

Step 5. Be smart with your withdrawals.

A simple way to stretch your retirement funds further is to manage your withdrawals smartly.

To achieve this, you need to calculate how much money you need each year to live on. Then you need to figure out how much you can safely withdraw each year to meet your needs and wants. And do not forget to account for the income tax impacts of those withdrawals.

The most recommended 4 % rule is a good starting point. You should be able to withdraw 4% annually without running out of money for 30 years if you have saved a sufficient nest egg.

If you did not save enough money to have a comfortable life in retirement, many experts recommend taking only 3% from their accounts. It is better to play things extra carefully. A small misstep early in your retirement could drastically affect your retirement years.

By leaving money in the account, your investments have a chance to grow in future years. Thus, going with a lower withdrawal rate will be more a conservative and smart way to manage your retirement funds.

Step 6. Look at your home equity.

Home equity is going to help out many of us who are lucky enough to own a home.

Your home is not only a shelter with a roof and walls but also your biggest financial asset that has increased in value over the years. For most households, home equity represents the biggest source of wealth.

There are many ways we can use that wealth to pay for our retirement.

Downsizing is one of the best ways to access the money you have in your home. It is a great option if you live in an expensive area, or your home is too large for your needs in retirement.

This may not matter to you if you have saved a sufficient nest egg for retirement. But most people have a limited amount of retirement savings. Downsizing and moving to a more affordable place to live could make all the difference in allowing your savings to last longer.

Keep in mind that housing is your biggest budget item. Even in retirement housing costs as a percentage of spending will remain around 35% on average.

Reducing your housing costs now will give you more cash to put toward your other retirement goals. Once you are retired, the fact that you have lower housing costs means you will need less income in retirement for this essential expense.

A reverse mortgage is often the best choice if you like your home, do not plan to move anywhere, and own your home mortgage-free. A reverse mortgage allows you to borrow some of your home equity while retaining ownership of your home.

But the best part is that you will receive a portion of your home equity in cash without requiring you to move out. However, the loan has to be repaid when the owner leaves the house.

6 Ways to Fund Retirement Lifestyle with Home Equity

Step7. Rebalance your portfolio for income and growth.

When you retire, your biggest challenge will be balancing the need for income today with the need for growth in future years.

When you are planning for 20 to 30 years in retirement, you need to rebalance your portfolio. But you need to play carefully with your portfolio to make sure you have enough money for today and tomorrow. Hence, if you can generate enough income from only a portion of your portfolio and let the rest grow, you are going to be in good shape for the long run.

You need to decide how much to allocate to stocks and how much to bonds.

Some financial advisors recommend a mix of 60% stocks, 35% fixed income, and 5% cash when you are in your 60s. As you age, your portfolio should become more conservative. This means having a smaller allocation in stocks and a higher allocation in bonds and fixed-income investments to preserve your capital.

Managing and rebalancing a portfolio requires a lot of work. If you don’t want to do it yourself, you have the option of working with a financial advisor who can do that heavy lifting for you.

6 Ways to Fund Retirement Lifestyle with Home Equity

by Maggie Leave a Comment

an elderly couple on a sofa-home equity funds retirement lifestyle

Do you know that your home is your biggest financial asset because of the home equity?

Over the years, your home has provided a haven for living your life. But it also has become your largest financial asset that increased in value. For many future retirees, home equity will be the biggest asset to fund their retirement lifestyle.

If you are getting closer to retirement, you need to plan how to maximize every asset you have. Your home can give you a huge financial advantage, especially if you have built up your home equity significantly.

When you retire, that money can be converted into retirement income, cash for everyday expenses and hobbies, or financial leverage for long-term care. No matter where you decide to live in retirement, the sooner you consider how to handle your real estate assets, the better prepared you will be.

What is home equity?

Home equity is a portion of your property that you ‘own’. When you purchased your home, you probably paid only 10 or 20 percent as a down payment and borrowed the rest of the money from the bank. Even though you are considered a homeowner, the bank owns the portion of your home until you pay off the loan.

How home equity works.

Home equity is the market value of your house minus what you owe. For example, the current market value of your house is $650,000, and you have a remaining mortgage of $250,000. Thus, your current home equity is $400,000 and this money belongs to you.

$650,000 – $250,000 = $400,000

When the prices are rising, your home goes significantly higher in value. So, you will build equity without any effort on your part. For example, if your home value has grown from $650,000 to $700,000, you will get more equity in your home.

$700,000 – $250,000 = $450,000

You can increase home equity by paying down your mortgage and/ or taking steps to increase market value through home improvement projects.

How to use home equity to fund your retirement?

If you decide to use your home equity, there are several ways to put this asset to work. But before deciding how your home can help you live the life you always wanted in retirement, calculate how much equity you have and whether your mortgage is paid off.

1. Downsize: trade your existing home for something smaller in size.

Selling your home is the most direct way to unlock the equity you have built in your house for decades. Keep in mind that downsizing can save you 35 percent or more on future housing costs.

Moving from a sprawling 3,500 square feet family home to a 1,000 square feet condo will help you reduce your cost of living. Because less space means less money, less maintenance, and less hassle. And the smaller the space the easier it will be to furnish and decorate.

You can spend the saved money on something more important such as travel, hobbies, and time with your family. After all, a smaller space has more value not only for your wallet but for your lifestyle.

The important thing to remember is that if you do not have enough money saved for retirement, downsizing will help you get extra cash to fund your retirement years.

For example, you carry a $100,000 mortgage. If you want to sell your home for $600,000, then downsize to a $350,000 smaller home or condo, you might walk away with a nice profit. Furthermore, you can buy your next smaller home with cash, without having to take out a mortgage.

High mortgage rates can be a problem.

If you have a mortgage on your current home with a low-interest rate and are looking to downsize and borrow money for your next home, keep in mind that the rate you can get will be much higher than your existing one.

Mortgage rates remain high in a current market. And they are highly unlikely to return to the rock-bottom levels of 2020 and 2021. If you are planning to finance your new home, it will be significantly more expensive than it was a year ago.

If you are already retired and live on a fixed income, downsizing will give you some significant savings down the road. But you have to compare it with how much interest you will pay over the time of the loan.

Furthermore, qualifying for a mortgage might be a problem if you are not working. Keep in mind that most mortgages are issued and approved based on your income and not on your assets. If you are not working, it will be harder to get financing because you cannot show the constant stream of your income.

2. Trade your existing home for something less expensive.

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

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

By moving to a less-expensive area, you will have more funds for travel, hobbies, activities, etc. And if your home is fully paid-off, it can free up money for the purchase of a less expensive home and perhaps a mortgage-free lifestyle.

But be honest with yourself. When you consider using your home to fund your retirement, figure out if starting a new life in a different place and a new location is for you.

3. Sell your existing home and rent.

Some people like the idea of selling their current home first, giving them the option to rent while deciding where to buy the next one.

There is a long list of pros and cons whether to rent or buy. However, there are still many good reasons to rent when you retire. One of the main reasons for you might be to increase your retirement funds. So, if you decide to sell your home and live on rent, you can stretch your retirement savings for longer.

Renting for a long time is not an ideal solution. But not everyone has a clear idea of what they want right away. So, you might want to rent temporarily and live in several places before purchasing a home.

4. Think outside of the box: sell your home and move abroad.

Retiring outside of the US has become a popular option among many baby boomers. A big reason is that many baby boomers didn’t save enough for retirement or their retirement nest egg lost value and never recovered.

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

It is hard to imagine that many baby boomers can afford to retire in Italy or France. These countries are rich in culture, history, and art, but they are not cheap. However, countries like Ecuador, Mexico, Costa Rica, or Panama can offer American retirees a low cost of living, reliable healthcare, and a decent public transportation system.

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

Other alternatives to downsizing.

5. Get HELOC or a home equity loan.

There is a proven fact that most 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.

If you need extra cash but do not want to sell your home, you can apply for a home equity line of credit (HELOC) or a home equity loan (lump sum). Both options will allow you to borrow up to 80% of your home’s equity. Closing costs with both can be cheaper, and you can get a repayment term as low as five years.

But if your home is paid off, any kind of loan means that you will have a new mortgage on your home.

Before taking any concrete steps, analyze your current and future finances. Calculate what your income is likely to be and the sources of that income.

6. Get a reverse mortgage (HECM).

If your home has gained a lot in value, look at the numbers and see if it might be cheaper to stay put and take out a reverse mortgage.

A reverse mortgage is also known as a home equity conversation mortgage (HECM).

There are many benefits of getting a reverse mortgage. It provides you with regular income 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. However, the loan has to be repaid when the owner leaves the house.

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

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

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

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7 Simple Ways to Pay Yourself in Retirement

by Maggie Leave a Comment

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.

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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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