If you are near retirement age, these tips on how to cut expenses will help you save more and give you the freedom to retire sooner.
And if you are still working, you are in a great position today to improve your life in retirement because you still earn an income. Your remaining working years could be a great time to explore some smart options of cutting expenses before you stop working.
According to the Bureau of Labor Statistics, Americans aged 65 and older spend about $48,000 per year ($4,000 per month) on average.
In retirement, most of your money will be spent on 3 big categories – housing, transportation, and medical.
According to the Bureau of Labor Statistics Consumer Expenditure Survey, for adults aged 65 and older:
- Housing represents 34% of spending
- Transportation represents 16% of spending
- Health care represents 13% of spending
1. Reduce housing cost.
I do not have to tell you that your housing costs eat up a big chunk of your money every month. Even in retirement, the cost of housing will be your biggest financial burden.
Bringing an unpaid mortgage with you into retirement will cause a lot of financial stress each month.
The cost of homeownership for the average American household is $13,153 annually without the cost of a mortgage.
Based on my own calculations, Roman and I spend $28,400 a year on mortgage, insurance, taxes, utilities, and maintenance. It takes 25 percent out of our annual budget without the cost of home improvements and major repairs.
According to statistics, the average retiree household spends around $17,472 per year ($1,456 per month) on housing expenses including mortgage, rent, property taxes, insurance, maintenance, and repairs.
Pay off your mortgage.
You will make your retirement life a lot harder if you must continue to pay a mortgage when you are not working. Plus, you still have to spend money on property taxes, homeowner’s insurance, maintenance, and repairs.
The simple fact that you have lower housing costs means you will need less income to cover this essential expense. In addition, you will have more retirement income left for other retirement expenses.
Retirees often have to withdraw money from retirement funds to cover their mortgage payments. Unfortunately, those withdrawals typically trigger more taxes.
Look at your mortgage balance and figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly.
Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments.
Refinance your mortgage.
Another smart option to reduce your mortgage debt is to refinance it at a lower rate.
In 2020 Roman and I refinanced our mortgage with AmeriSave Mortgage Corporation at 2.5 percent. It helps us bring down our monthly payments and save up to $500 a month.
Unfortunately, not everyone can pay off a mortgage. Retiring with mortgage debt is becoming a more common scenario.
If you cannot afford to pay off your mortgage, you might consider selling your home.
Downsize your home.
Are you an empty nester? Then it might be the perfect time to reconsider your living condition.
The smart choice would be to sell your home and move to a smaller home or condo. By reducing your housing costs today, you can get extra cash into your pocket before you retire.
Look at the advantages of a smaller home or condo:
- A smaller mortgage
- Lower property taxes
- Reduced homeowner’s insurance premiums
- Fewer maintenance costs
- Less yard work, especially if you get a condo
To help you get started, here are a few useful articles you may want to read:
2. Reduce transportation cost.
According to statistics, the average retiree household spends around $7,492 a year ($624 a month) on transportation.
The cost of transportation is likely to drop when you stop working. While you will not spend money on commuting anymore, not all your transportation expenses will disappear.
We all know that cars are expensive. Not only you have to pay for gas, maintenance, and repairs, but you also need to insure them. With inflation and gas prices going up every year it will make your life on a fixed income more difficult.
If you need a car, your goal should be to spend the least amount of money on a reliable car.
Here are a few options of how to reduce the costs of your vehicles before you retire:
Downsize your vehicles.
One of the best ways to reduce the cost of transportation is to downsize your vehicles.
If a large chunk of your income goes into maintaining several cars or driving luxury cars, I would suggest downsizing or choosing a different car. Going from two cars to one or downgrading to a less expensive car can help you significantly reduce the costs of gas, auto insurance, and maintenance.
According to LendingTree, the cost of a new car, including additional costs like fuel, insurance, and tires is between $23,903 (a small car) to $57,267 (a full-size car) per year.
However, if you have already paid off your car, it makes more sense to keep it as long as you can. That way, you do not need to worry about monthly car payments. Instead, you can take that money and use it to pay down any other debts or save more for retirement.
Buy a used car.
Many people choose to lease their cars because they want to have a new car every few years. Leasing works better if you are on the road for business and can deduct the lease payments.
But if you are near retirement, buying a good used car rather than a new one for the image will help you afford retirement sooner.
Most of the vehicles lose about half of their value by the time they are five years old. So, if you decide to buy a used car, a three-year-old car will cost you less in upfront expenses and maintenance.
Between paying on average $40,000 for a new car, you can save a lot of money by spending on a used car only $22,351(at the end of January 2021).
A useful post from LendingTree: Should I Buy a Used or New Car?
Use public transportation.
In case you are planning to move from the suburbs to an urban area, you should sell your cars and take advantage of public transportation.
In this scenario, you do not need to worry about the costs of your vehicles at all. Just buy a monthly public transportation pass. And when you want to go on a road trip, simply rent a car.
Use car-sharing services.
Most urban cities also have car-sharing services that give you easy and affordable access to a car for temporary needs.
Also, using services like Uber or Lyft can help you save money without the regular monthly costs associated with owning or leasing a car. With the gas prices are going up every year, you do not need to worry about that additional expense.
3. Get rid of a high-interest debt.
High-interest credit card debt can be one of the biggest burdens on your financial life in retirement.
Most of the credit cards come with high-interest rates – 18 to 20 percent.
If you carry a big balance on your credit cards, you will be stuck paying that required minimum every time your credit card bills come due.
Keep in mind, that if you bring a mortgage, high-rate credit card debt, and maybe a car loan into retirement, you will put a lot of pressure on your limited finances.
There are two most popular debt payment strategies:
- The snowball strategy
- The avalanche strategy
The snowball strategy – you are paying off debt from smallest balance to largest.
First, you focus on paying off the credit card with the smallest balance. Then you move on your next smallest credit card bill until all credit card debt is paid off in full.
The avalanche strategy – you organize your payments by interest rate – from high to low.
First, you pay off debt with the highest interest rate as quickly as possible (even with extra money). Then you move on to the card with the next highest interest rate.
I recommend focusing on your highest-interest debt first because the longer it takes you to pay it off, the more money you will pay towards interest.
And if you can help it, do not add any more debt to the pile while paying off old debts.
A helpful post:
4. Review your insurance coverage.
Getting closer to retirement might be a good time to review how much you spend on insurance and how to cut that expense.
Life Insurance
First, you might look at your life insurance and decide if you still need it.
The main purpose of life insurance is to replace lost income. If your kids are grown and you no longer have any dependents who will need financial help after you die, it might be wise to drop policies. Paid-up policies can be sold.
If you have a term life policy, make sure you understand whether the payout at your death is worth the cost of the premium you are paying today.
Auto and homeowners’ Insurance
You might also look at your deductibles for your vehicles and homeowners’ insurance policies.
When you are still working, it makes sense to set your deductibles low. But low deductibles increase the amount you pay in insurance premiums. So, when you raise your deductibles, you will pay less for your vehicles and homeowners insurance premiums.
Once you retire, you might want to pay less for your insurance policies so you will have more money to cover your daily expenses.
Healthcare
In retirement many people will spend most of their money on health insurance, medical services, and drugs, as they age.
I my articles I often write about the cost of medical expenses in retirement. Because I want to remind my readers that healthcare is going to be their second biggest expense after housing, and they need to plan for it.
According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple may need around $300,000 saved (after tax) to cover healthcare costs in retirement.
Here is a helpful article you might want to read:
Most people will be eligible for Medicare at age 65. But if you plan to retire before age 65, you will need to find a separate plan to cover your medical expenses.
Individual health insurance is expensive and could cost more than $1,000 a month. Make sure to shop around for the best prices.
Even being eligible for Medicare brings its own set of challenges because it does not cover all medical expenses.
Medicare is not free. It does not cover premiums, deductibles, co-pays for doctor visits, dental and vision care, long-term care, personal care, and other expenses.
Long-term care insurance is the most recommended way of planning for future expenses.
Long-term care insurance will help you not be a financial burden on your family if that time comes. It will cover nursing homes, assisted living facilities, and in-home care.
After all, you do not want to leave your husband or wife with nothing because the entire nest egg was spent on taking care of you.
Final Thoughts
If you do not know what your expenses look like in retirement, it will be difficult to predict how much money you need to save for the future.
But if you can get a sense of what to expect, it will be relatively easy to cut your expenses in these categories before you retire.
Have you had more ideas on how to cut expenses before retirement?
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