retirement budget

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

a couple at the restaurant in Spain-to retire comfortably

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

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

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

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

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

Step 1. Income

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

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

The main sources of your retirement income will be:

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

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

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

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

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

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

Should You Have an Annuity in Your Retirement Plan?

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

Step 2. Expenses

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

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

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

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

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

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

Step 3. Compare your retirement income to expenses.

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

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

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

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

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

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

$42,000 – $35,000 = $7.000

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

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

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

Step 4. How much is your nest egg?

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

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

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

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

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

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

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

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

Step 5. Lifestyle

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

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

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

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

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

Aging Friendly Improvements for Every Home Remodeling Project

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

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

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

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

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

How Much a Nest Egg Is Enough to Retire Comfortably?

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

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

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

Have you saved enough for a comfortable retirement?

Helpful Posts:

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How to Retire Well on a Small Budget

by Maggie 4 Comments

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

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

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

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

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

Pay attention to your spending.

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

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

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

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

How to Cut Expenses Before You Retire

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

Best Budgeting Apps

Reduce your housing costs.

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

Luckily, we have many options to choose from:

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

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

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

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

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

5 Common Mistakes to Avoid When Choosing a Place for Retirement

Reduce your transportation costs.

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

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

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

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

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

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

Reduce your food costs.

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

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

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

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

Learn to cook

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

person holding sliced veggies - retire well on a small budget

Plan meals in advance

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

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

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

However, there are always ways to shop smart:

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

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

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

Learn to eat out for less

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

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

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

Check out this website for Restaurant Deals and Specials

Sign up for Groupon to receive coupons and discounts

Take care of health to reduce medical costs.

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

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

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

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

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

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

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

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

How to Stay Fit for a Healthy Retirement

Travel and entertainment on a small budget.

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

Portugal coast - travel on a small budget in retirement

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

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

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

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

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

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

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

Retirement Travel Tips for Planning a Vacation

Final Thoughts

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

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

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How to Cut Expenses Before You Retire

by Maggie Leave a Comment

woman with laptop - cut expenses before retirement

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.

credit card - cut credit card debt before retirement

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:

How to Pay Off Debts Before Retirement

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:

How to Plan for Rising Healthcare Costs

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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Checklist for Retirement Planning in Your 60s

by Maggie Leave a Comment

woman making notes at table outdoor - retirement planning in 60s

When you are in your 60’s you know that your retirement is around the corner. Getting closer to the retirement date can be both exciting and stressful. Everyone wants to have a happy and comfortable retirement.

But when you have a limited number of remaining years you need to take time to understand your retirement picture. You do not want to be one of those people who want to retire, but when that day finally arrives, they just let it happen. You want to be smart and invest time in planning and preparing for a big day. Before you take the plunge make sure that you are ready!

Here is a checklist of helpful steps to take for people in their 60s who plan to retire in the next 5 to 7 years:

1). Understand your retirement lifestyle.

Before talking about finances, I want you to answer the following questions:

Where do I want to live in retirement?
What do I want to do in retirement?

Answering these questions is important because it will determine the cost of your retirement. Most people already have a vision of their next phase of life. But not everyone goes into the details of planning it.

Think about retirement in stages. Your early years of retirement are going to be the most active. Then you will settle down and face a slowdown in your activities. Your retirement lifestyle will determine the cost of your retirement.

For example, I love to travel and have a long bucket list of places I want to see and countries to visit. plan on traveling the world when we retire. Once we retire, we are planning to spend half a year abroad traveling. That will take a significant amount of money to cover our travel expenses. But we already have determined a retirement budget for the first 5 years of our travels. Eventually, we will slow down and start spending more time at home. Going on one or two big trips a year will be all we can afford to pay for the cost of traveling.

Being in your 60s is an ideal time to look at your retirement plans. You are close enough to retirement to have a realistic idea of how you want to spend your golden years.

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2). Finalize your income and expenses.

Once you have a picture of your retirement lifestyle you need to finalize your financial assets and see if you have enough money saved to pay for this life.

Income

Financial experts suggest that you need about 80 percent of your pre-retirement income to maintain the same standard of living in retirement. Suppose my current annual income is $60,000. Multiply that number by 80 percent ($60,000 X 0.8 = $48,000). So, I will need around $48,000 in retirement to live the way I do today.

This number is a good rule of thumb if you do not plan on making any major budget changes when retire. However, not all retirees spend less in retirement. And if I have expensive hobbies like traveling, I will need a higher number.

Now when you are close to retirement, the rule of thumb “80 percent of pre-retirement income” should be replaced with real numbers. This number should include your daily living expenses and the money you want to spend on hobbies and activities.

Sources of retirement income:

When you are working you probably have a single employer and a single source of income – your salary. In retirement, everyone has different sources of income. As a retiree, you receive income from multiple sources:

Guaranteed income:

Social Security
Pension
Annuity – a guaranteed income you must purchase yourself

Other sources of income:

Part-time job
Rental income
Business
Dividends

Income from your retirement funds:

Tax-deferred accounts – 401(k), IRA
Tax-free – Roth IRA, Roth 401(k)
Taxable investment accounts
Taxable bank checking and savings accounts

While working, you receive a paycheck regularly – probably every two weeks. When you retire, you might receive income monthly, quarterly, annually, and even irregularly. Getting a clear picture of your retirement income should help to make sure that you have enough money to cover all your living expenses.

Expenses

I know nobody likes to read about budgeting. But the best advice is to create an estimated retirement budget based on your current and future expenses. You might have a general idea of what you spend now. But you will be better prepared if you have a clear picture of your expenses now and how that might change in the future.

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. But you will start spending more money on travel, hobbies, and activities. And your medical expenses will increase with time.

lake-boats-flowers-retirement planning and retirement expenses

It is important to include big-ticket expenses into the retirement budget as well. Paying for a wedding, buying a new car or a lake house will require a significant amount of money withdrawn from your retirement funds.

If you do not know how to create a retirement budget or organize your finances for retirement, I recommend reading my articles:

3). Minimize your debt.

When you are in your 60s make it a goal to pay off your credit card debt, student loans, car loans, home equity loans, and any personal loans before your retirement date. Do everything you can to retire debt-free and even pay off your mortgage if possible.

When you stop working and start living on a fixed income you will need to stretch those retirement dollars as far as you can. How can you enjoy your retirement if you must spend a portion of your retirement income to make mortgage or debt payments each month?

Credit cards

If you are carrying a high-rate credit card debt you are putting a lot of pressure on your finances. There are two most popular debt payment strategies – the snowball strategy and the avalanche strategy.

The snowball strategy works by paying off the credit card with the smallest balance and then working your way up until all credit card debt is settled. The avalanche strategy allows you to pay off your highest interest rate debt first and then work it down. 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.

Over the years Roman and I have accumulated $170,000 in debt – car loans, student loans, construction loans, and medical expenses. It took us 21 years (from 1999 to 2020) to pay them off. The only debt we have left is the mortgage. We try to increase our payments towards the principal. Recently, we refinanced but I do not think we will finish paying it off in full before we retire.

Mortgage

When you are in your 60s, one of the smartest things you can do is to pay off your mortgage before you retire. A mortgage-free retirement is usually best because you can spend more money on the fun stuff. Retirees often have to withdraw money from their retirement funds to cover their mortgage payments.

Unfortunately, those withdrawals typically trigger more taxes. That is why it is better to pay down your mortgage while you are still working, so you can keep your housing expenses low.

Look at your mortgage balance and try to 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. In addition to that look into refinancing your mortgage to get a lower rate and to reduce your monthly payments.

However, for many people paying off the house is not financially possible. When a payoff is not feasible, you should reduce mortgage debt by refinancing it. We recently refinanced our mortgage with AmeriSave Mortgage Corporation at 2.5 percent. It helps to lower our monthly payments and save us $500 a month.

When you are in your 60s, getting out of debt should be your priority. At this age, you have to make the most of your remaining years in the workforce to increase your retirement savings within the next 5 to 7 years.

I recommend reading my article:

How to Pay Off Debt Before You Retire

4). Maximize your retirement savings.

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

Whenever possible, increase your retirement contributions up to the maximum allowed in retirement plans such as 401(k), IRA, and Roth IRA.

The 2021 contribution limits are:

$19,500 for 401(k) retirement plans. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $26,000.
$6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people age 50 or older is $1,000. So, you can save up to $7,000 with your pre-tax money (IRA) and after-tax money (Roth IRA).

When you are getting closer to retirement, maximizing your traditional 401(k) and IRA accounts is important but not always enough. While you are still working you can make it a priority to save even more money in your Roth IRA account, emergency fund, and perhaps taxable investment funds if possible.

Another way to increase your retirement savings is to work longer. The goal is to make the most of your working years. You need to maximize the time you have left. Earning an income for a few more years could improve your financial security in retirement.

I am sure you may not like to hear this, but the fastest way to save more money for retirement is to cut your expenses. If you start practicing how to curb your spending and live on less money today, it will make your life easier in retirement.

Many people in their 60s enjoy the life of empty nesters. When the kids are gone, they start spending more on luxuries. It is easy to get used to a luxurious lifestyle, start spending more and saving less. However, it will be tricky to save money and even to retire if you let your spending get out of control. After all, the less you spend the more you save.

5). What is your retirement income plan?

After decades of earning and saving money for retirement, you need to shift gears and start spending what you have saved. And being just a few years away from retirement date is the best time to find out how much income you can pull from your nest egg.

There are three sources of your retirement income:

Social Security
Pension income (if you are the lucky one)
Income from your investments and savings

When you stop working you need money to pay for your retirement expenses. After you retire, you will receive Social Security payments. But that will be only a portion of your retirement income. You will start receiving payouts from your retirement savings.

But you will have to figure out a strategy of how to withdraw money from your retirement funds. This withdrawal strategy should give you the income you need from your first month of retirement through your 80s or 90s.

The “4% rule” is a well-known rule of thumb and a good starting point. According to this rule, you can withdraw 4% of your account balance.

For example, if you have $500,000 saved in retirement funds you can withdraw 4% of that amount – $20,000 in the first year of your retirement. You can adjust that number every year for inflation but following this rule should help you not to run out of money for at least 30 years.

Though, you have to be aware that there are a few problems associated with following this rule:

Return risk – the risk of earning smaller returns than it was in the past.
Longevity risk – the risk of living a long time and running out of money at the end of your life.
Series of return risks – the risk of a market downturn during your early withdrawal phase.

Even it is not perfect, the 4% rule is a good starting point you can adjust with time.

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6). Decide how to cover medical expenses.

You will become eligible for Medicare at the age of 65. If you plan to retire before age 65 you will need to find a separate plan to cover your medical expenses.

Your health insurance provided by your employer ends when you stop working. Even though your current employer promise to cover your health insurance in retirement does not mean they will not change their mind in the future or reduce coverage significantly. Thus, you will need to find and buy your health insurance coverage. 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 does not cover premiums, deductibles, co-pays for doctor visits, dental and vision care, long-term care, personal care, and other expenses. This means you need to include healthcare costs in your retirement budget.

7). Protect yourself and those you love.

Have you thought about how to protect yourself as you age and how to help your family care for you if you need it? When the time comes that you need assistance who will manage your finances, your medical care, and your regular day-to-day life? I understand that these are difficult topics to discuss. But it is a part of reality to grow old. And if you love your family you will plan for it, so your loved ones will not struggle and may have to scramble to care for you.

I write often in my articles about the cost of medical expenses in retirement. I want to remind my readers that healthcare is the second biggest expense in retirement after housing and you need to plan for it. Medicare is not free. It does not cover all your medical expenses and does not pay for long-term care.

Long-term care insurance is the most recommended way of planning for future expenses. It will cover nursing homes, assisted living facilities, and in-home care. It will help you not to be a financial burden on your family if that time comes. And you do not want to leave your husband or wife with nothing because the entire nest egg was used up taking care of you.

8). Think of tax strategies.

In retirement, we still need to pay taxes, but not all sources of income are taxed the same.

American dollars on a table - prepare tax strategy in your 60s

Withdrawals from tax-deferred accounts such as 401(k) plans and traditional IRAs will be taxed as an ordinary income. Withdrawals from Roth IRAs and Roth 401(k) plans will be tax-free. If you want to withdraw money from taxable investment accounts, you will have to pay capital gains taxes.

In addition to taxes, you need to remember about required minimum distributions (RMD). You will face this requirement when you reach the age of 72. By the US tax law, you are required to start taking withdrawals from your retirement accounts such as 401(k) and IRA (excluding Roth IRAs). The amount you must withdraw will be determined by the IRS. If you have more than one retirement account, you can withdraw money from each account or total RMD from just one account.

It is important to remember that your RMD withdrawals might push you into a higher tax bracket.

Think about what tax strategies will work for you the best. If it makes more sense, you can roll your assets into Roth IRA before you reach RMD age. Another option is to start taking withdrawals from your retirement accounts before RMD kicks in so you would not face the sudden jump in taxes.

9). Reallocate your investments.

The last few years have been volatile years for financial markets. Many people pulled money out of the stock market. When you are close to your retirement date is tempting to stay away from stocks to reduce the risk of losing money in your retirement funds.

But keep in mind that stocks provide growth. And investing in growth is important at this stage of life. If you retire at 65 and spend 20 to 30 years in retirement, you need to have enough growth to make your money last that long.

Put it on your checklist to review your asset allocation and make sure your portfolio is diversified and invested for growth. What I am suggesting is to have a balanced mix of stocks, bonds, mutual funds, and other assets that fits your retirement goals.

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Final Words

Your 60s is a decade full of transitions. Perhaps your kids are out of the house, and you are thinking about downsizing. Perhaps you would like to relocate to a warmer climate. Medicare will kick in at 65 and you may also find yourself ready to leave the full-time job that defined so much of your daily life. Somehow you have to navigate the various transitions in this new period of your life.

Regardless of how you plan the transition to retirement, your most precious asset at this stage of life is your attitude. How you envision your future is everything. A positive attitude will carry you forward into the future and your golden years.

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Everything to Know Before You Retire

by Maggie 2 Comments

Woman at computer - things to know before you retire

Retirement is a life-changing event. And like many things in life, preparing for retirement requires a lot of planning. You do not want to be one of those people who want to retire, but when that day finally arrives, they just let it happen. You want to be smart and invest time in planning and preparing for a big day.

Getting closer to retirement can be both exciting and stressful. You need to know if you are financially ready. And you need to understand how you will spend your days when you stop working.

Retiring without a plan can be disadvantageous. The better you are prepared and see what you are retiring to, the more successful you will be at this transition. Sometimes a step-by-step guide or “to do” list can help. I have created this post with all the things you need to know before you retire.

1. Know your financial situation and retirement needs.

The first step is to evaluate your finances. I read that new retirees have some financial anxiety related to the fact that they no longer earning a regular paycheck. The Baby Boomer generation is redefining what senior living and ‘retirement’ means.

The Boomers want more out of their retirement lifestyle – more activities, more wellness, and sometimes more of everything. But all these luxuries cost money. Not to mention ordinary bills for food, transportation, utilities, medical insurance, and taxes that must be paid every month.

Calculate what you need financially to support your retirement lifestyle.

You should have enough saved to live on 80 percent of your annual pre-retirement income. This number is a good rule of thumb if you do not plan on making any major budget changes.

You might have a general idea of what you spend now. But you will be better prepared if you get a clear picture of your current cost of living and how that might change in the future.

The best advice is to create an estimated retirement budget based on your current and future expenses.

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Get a clear picture of your retirement income.

money bills & calculator - know your financial situation

When you are working, you probably have a single employer and a single source of income – your salary. In retirement, everyone has different sources of income. As a retiree, you receive income from multiple sources: Social Security, pension, part-time job, or rentals.

Another source of income will come from your nest egg – investments and retirement savings:

Tax-deferred accounts – 401(k), IRA
Tax-free – Roth IRA, Roth 401(k)
Taxable investment accounts
Taxable bank checking and savings accounts

You need your nest egg to last through the next 20 or 30 years. Therefore, it is recommended to withdraw a safe 4 percent from your retirement portfolio.

For example, if you have $500,000 in your 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, and calculate if it is enough to cover all your retirement expenses.

According to the stats, the average Social Security benefit in 2020 was about $ 1,514 a month, or about $18,170 a year.

To calculate the retirement income based on the numbers above:

$20,000 + $18,170 = $38,170 a year or $3,180 a month.

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Know your withdrawal strategy.

Do you know how much income you can pull from your nest egg? A good starting point for many retirees will be a well-known rule of thumb – the “4% rule”.

The 4 percent rule refers to your withdrawal rate. If you have a well-balanced retirement portfolio (60 percent stocks and 40 percent bonds), you can withdraw 4 percent of your account balance.

For example, if you have $500,000 saved in retirement funds you can withdraw 4 percent of that amount – $20,000 in the first year of your retirement. Then, you should adjust that number every year for inflation. But following this rule should help you not to run out of money for at least 30 years.

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Think about your tax strategies.

We still need to pay taxes in retirement, but not all sources of income are taxed the same. Withdrawals from tax-deferred accounts such as 401(k) plan and traditional IRA will be taxed as an ordinary income.

Withdrawals from Roth IRA and Roth 401(k) plan will be tax-free. If you want to withdraw money from taxable investment accounts, you will have to pay capital gains taxes.

In addition to taxes, you need to remember about required minimum distributions (RMD). You will face this requirement when you reach the age of 72.

By the US tax law, you are required to start taking withdrawals from your retirement accounts such as 401(k) and IRA. The amount you must withdraw will be determined by the IRS. If you have more than one retirement account, you need to withdraw money from each account.

You need to remember that RMD withdrawals might push you into a higher tax bracket and you need to plan how to pay for additional taxes.

Know your medical expenses and long-term care coverage.

You will become eligible for Medicare at the age of 65. If you plan to retire before age 65 you will need to find a separate plan to cover your medical expenses.

Many baby boomers who are close to retirement still believe in free Medicare. I assume people do not do enough research to understand that Medicare does not cover all your medical expenses.

Medicare does not cover premiums, deductibles, co-pays for doctor visits, dental and vision care, long-term care, personal care, and other expenses. It is important to remember that healthcare is the second biggest expense in retirement after housing and you need to plan for it.

We all know that the healthcare cost is rising. According to recent data from Fidelity, the average out of pocket healthcare cost for a 65-year-old couple will be close to $285,000 instead of $265,000 as it was a few years ago. And that number does not even include long-term care costs.

2. Expect to go through the emotional stages in retirement.

woman - rocky beach - things to know before you retire

Most people go through an emotional process when adjusting to retirement. In the beginning, there is a feeling of freedom and being like on a vacation that is going to last forever. Then, after a few years of fun and enthusiasm, you might start feeling bored.

You will learn that retirement is not a constant vacation. Eventually, you will realize that you have to fill up your days with something more meaningful than just traveling or playing golf.

It is good to be mentally ready for your new phase of life. You do not want to realize that most days you have nothing special to look forward to when you wake up in the morning. Or you do not have any reason to leave your house during the day. Or deep inside you wish you were not retired.

Like many other life transitions, retirement comes with emotional and mental adjustments. If you learn more about the emotional stages of retirement you will know what to expect. That knowledge will help you to better navigate the transition to retirement.

3. Structure your days in retirement.

Before retirement, your life has a predictable routine. The alarm goes off, you take shower, have breakfast, pack your lunch, and head out the door. Your job gives you focus and discipline and forces you to get up every morning. Work takes priority and everything else in life is scheduled around it.

But when you retire, there is nothing but time. Thus, you need to replace the established routine with something new. Waking up and trying to figure out what to do each day can be depressing.

You need to create a new routine that helps you plan your days otherwise you have no reason to get up every morning. It could be a hobby, a sport, a new skill, a part-time job, or volunteer work. Do not go to retirement without having a plan about what you are going to do to stay busy.

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4. Stay socially active and grow your friendship.

After many years of meeting people at work and seeing them every day, it might not be possible to keep up with them when you retire. You might feel isolated from your friends. You might start drifting through the days without much to do if you do not get socially connected with other people.

You can stay connected with your old friends by planning social events. If you are friends with other couples, invite them over for dinner or board games once a month. For many people, their social life relates to their work. However, you can do many things to improve your social life in retirement.

Take advantage of your free time in life to make new friends. It is not hard to find a volunteer job, join a group in the local community, or start taking a class at a senior center. Another thing you can do is to start a new club or join the club. It could be a reading club, a walking club, or a gardening club.

Staying socially active will restructure your daily routine. It will help you to feel that you are doing something meaningful beyond watching Netflix, doing crosswords puzzles, or reorganizing the house.

Putting It All Together

I am sure you have thought a lot about how you will enjoy your life in retirement. But there is a good chance you never thought much about how to transition from the workplace to retirement.

The key to a happy and comfortable retirement is in planning and preparing for it. It includes not just financial planning but envisioning your life in retirement. The more time you spend to know your retirement lifestyle goals, hobbies, and activities, the more successful you will be at this transition.

And If you do it right it might be the best time of your life!

Are you ready to retire? Do you have a clear picture of your retirement? Share your thoughts in the comments below.

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