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How to Retire Well on a Small Budget

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

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

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

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

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

Pay attention to your spending.

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

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

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

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

How to Cut Expenses Before You Retire

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

Best Budgeting Apps

Reduce your housing costs.

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

Luckily, we have many options to choose from:

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

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

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

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

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

5 Common Mistakes to Avoid When Choosing a Place for Retirement

Reduce your transportation costs.

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

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

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

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

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

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

Reduce your food costs.

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

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

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

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

Learn to cook

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

person holding sliced veggies - retire well on a small budget

Plan meals in advance

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

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

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

However, there are always ways to shop smart:

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

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

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

Learn to eat out for less

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

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

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

Check out this website for Restaurant Deals and Specials

Sign up for Groupon to receive coupons and discounts

Take care of health to reduce medical costs.

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

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

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

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

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

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

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

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

How to Stay Fit for a Healthy Retirement

Travel and entertainment on a small budget.

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

Portugal coast - travel on a small budget in retirement

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

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

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

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

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

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

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

Retirement Travel Tips for Planning a Vacation

Final Thoughts

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

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

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Should I Pay Off a Mortgage Before Retirement?

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

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

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

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

Reasons to consider paying off your mortgage before retirement.

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

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

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

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

Here is a related post you might want to read:

Benefits of paying off your mortgage before retirement.

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

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

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

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

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

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

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

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

How to pay off your mortgage before retirement:

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

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

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

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

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

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

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

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

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

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

Reasons not to pay off your mortgage before you retire.

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

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

Tax benefits. Your mortgage interest is tax-deductible.

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

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

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

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

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

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

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

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

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

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

Downsizing. Your home is one of the biggest investments.

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

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

Related Post: 5 Tips on How to Downsize for Retirement

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

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

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

But many people would prefer to stay in their homes and retire in place. They want to remain in their neighborhood for life.

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

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

A reverse mortgage is also known as a home equity conversation mortgage (HECM). It provides income to retirees and does not require monthly payments. You still have to pay taxes and home insurance, and you will be responsible for maintenance.

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

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

One option is to use HECM for your medical or long-term care expenses late in life when you run out of money.

Another option is to set up an annuity to increase Social Security and any other retirement income you will receive.

However, reverse mortgages can be complicated. There are many terms and conditions, and it is a relatively expensive way to borrow money. So, make sure to do your research to understand all the pros and cons, and talk to a loan specialist.

Your Guide to Reverse Mortgages

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

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5 Biggest Expenses in Retirement and How to Reduce Them

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couple by the door - biggest expenses in retirement

Many future retirees expect to be spending less than they were spending before retirement. But according to the latest Consumer Survey from the U.S. Bureau of Labor Statistics the average retiree household spends around $50,200 per year (or $4,183 per month), while the average household spending is $63,036 (or $5,253 per month).

Although some expenses such as costs of commute, business clothes and lunches, insurance, payroll taxes (if you are not working) will go down or disappear in retirement, many others will go up.

Here is a look at the list of the 5 biggest expenses in retirement and some tips on how to reduce them.

1). Housing Expenses

The cost of housing is the biggest financial burden we face. We all should remember about a long list of expenses as part of owning a home:

  • Monthly mortgage payments of principal and interest
  • Real estate taxes
  • Homeowner’s insurance
  • Utilities, including electricity, heat/gas, cable, wireless, etc.
  • Water and sewage
  • Trash and garbage collection
  • Regular ongoing maintenance
  • Repairs and maintenance
  • Renovation or improvement projects

The cost of homeownership for the average American household is $13,153 annually without the cost of a mortgage. I have calculated that Roman and I spend $28,400 a year on a mortgage, insurance, taxes, utilities, and maintenance. These costs take 25 percent out of our annual budget without the cost of home improvements or major repairs.

The good news is that there are many ways you can reduce the cost of ownership in retirement:

Pay off your mortgage. 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.

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. With mortgage interest rates at all-times low in 2021, I highly recommend to refinance your mortgage ASAP. We refinanced our mortgage in February with AmeriSave Mortgage Corporation at 2.5 percent and saving about $500 a month. Overall, refinancing will help to lower your monthly payments and ease the financial burden on your retirement income when you stop working.

Downsize your home. If the kids are living on their own and you find yourself an empty nester living in that huge house, then it is a perfect time to downsize your home. Downsizing is one of the best ways to reduce your monthly living expenses. You can sell your home, and move to a smaller home or condo, so you can get extra cash into your pocket today.

Think about 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.

Take on a tenant. If your mortgage is paid off and you prefer to retire in place, you can rent out a room in your home. I understand that being a landlord is not for everyone. But if you do not want to leave your current home and neighborhood, taking on a tenant will help to reduce the expense of owning a home.

Related Content:

2). Transportation Expenses

The cost of transportation is likely to drop when you stop working. While you will not spend money on commute anymore, not all your transportation expenses will disappear. You still will have to budget for the cost of vehicles, gas, insurance, maintenance, and repairs.

desk-laptop-bag-transportation expenses in retirement

Downsize your vehicles. We all know that cars are expensive. 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. The savings on insurance, gas, and maintenance will significantly reduce your transportation cost in 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 getting closer to retirement, buying a good used car, rather than a new one for the image will help you afford retirement sooner. In the end, the cost of buying should be less expensive than leasing a car in the long run.

Public transportation. Another option to consider for retirement is to move close to an urban area and take advantage of public transportation. In this scenario, you might not need a car at all. When you want to go on a road trip, simply rent a car.

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.

3). Healthcare Expenses

You can expect your medical expenses to be some of the biggest in retirement. With rising life expectancy and healthcare costs, you should expect to pay more for this budget category as you grow older.

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 two years ago. And that number does not even include long-term care costs.

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. Before you retire, it is a good idea to have a clear understanding of what Medicare covers and what it does not. Knowing that will help you save hundreds of dollars.

Most people will be eligible for Medicare once they turn 65. But if you retire early, you have to find and purchase health care insurance on your own. Medicare consists of 4 parts and each part covers specific medical services. Although Medicare covers a wide range of health problems, it does not include most dental care, hearing aids, and long-term care.

There are several ways to avoid being hit by a big medical bill while living on a fixed income and do not how to pay for that:

First, you need to plan for future healthcare expenses and save more money. You can set up a health savings account (HSA) and start contributing money regularly. It is a tax-deductible account that helps to reduce your taxable income. With withdrawals from HAS, you can pay for qualified medical expenses, including dental and vision.

Next, you need to decide how to pay for long-term care if you or your partner need it. Long-term care insurance is the most recommended way of planning for future expenses. It will help you not to be a financial burden on your family if that time comes.

Lastly, do not forget to get regular check-ups, screenings and to visit your doctor, so that if any problems get caught early you can do something about them.

The best way to reduce healthcare costs is to take care of your health so you can live a long and healthy life in retirement. What you eat today and how often you exercise will impact who you are in 10 or 20 years. Being active and eating right can add more years to your life and save money on future medical bills.

Related Content:

4). Food expenses

The cost of food is rising gradually, and it has a big impact on a home budget. Roman and I spend almost $10,000 per year on food, and it does not include eating out. We used to spend $100 to $150 for a nice dinner in Boston once a month. If you add buying lunches for the two of us twice a week, it will add another $40 to $60 per week. Overall, we would spend almost $5,000 on just eating out.

Since the covid pandemic, we stopped spending money on restaurant meals and take-out lunches. Instead, I buy groceries at Whole Food or Wilson Farm stores and cook homemade meals. This way I know that we eat great and healthy food. And our last year’s budget showed that our decision to cut on eating out saved us a lot of money.

It is not that you should never eat out. But if you are retired and worried about covering your daily expenses, reducing the number of times you dine out at a restaurant can help to reduce the cost of it.

However, one of the best ways to save money on food is cooking and eating at home.

5). Travel expenses

For many baby boomers traveling is the number one goal on their retirement bucket list. After all, most people want to explore the world when they have so much time on their hands.

But traveling is expensive. You have to spend money on accommodations, air tickets, restaurant meals, rental cars, entertainment, tours, and more. While you are working you are limited to a few weeks of vacation. But when you retire you are more flexible with your time of travel.

city road decorated - travel expenses in retirement

To reduce the costs of travel you can take advantage of last-minute bargains, travel at an off-peak season, use senior discounts, and slow the pace of your travel. However, if you are anything like me and my husband, you can expect the travel budget only to grow in retirement.

Eventually, I would expect our travel cost to drop off when we are in our 80s or 90s. But I would expect the decades of amazing and memorable trips until we are too old to travel.

Related Content:

Final Thoughts

As I said before, your expenses are likely to decline with age because most people don’t need as much as they grow older. In the early years of retirement, you will be relocating, traveling, and maybe spending more on luxuries you missed to enjoy when you were busy working.

But later in retirement, you are more likely to be settled in your lifestyle. You are less likely to be actively spending in your 80s or 90s. Your life will become simpler and more limited with changing your energy levels and health.

While no one can see into the future, we all still need to do a good job of predicting and probably reducing our expenses by planning ahead of time. In the end, it is critical to get your big expenses under control before you retire so you can account for them in your retirement budget. After all, you do not want to run out of money fast so you have to start looking for a job in your 80s.

Are you planning to reduce your expenses? Share your comments and ideas with us.

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Planning for Retirement in Your 50s

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Woman-car-retirement planning in your 50s

We have heard so many times that the sooner you start saving for retirement the better off you will be in your old age. But when you are in your 20s and 30s you are not in a rush to save for retirement. It is easy to fall into a trap thinking you have plenty of time to do that later. Suddenly, you are in your 50s and have not saved enough for your golden years.

Life has presented you with some challenges. You were busy with kids, saving for their education, straightening out debts, and trying to pay off a home mortgage. In the end, there was never that much money left. But do not despair, because it is not too late. If you are in your 50’s and fell behind on your retirement goals, there are things you can do to boost your retirement savings.

Use these smart steps to find out how to catch up on planning for retirement in your 50s.

1. Retirement projection

Start with figuring out how much money you will need to retire. First, find out how much income you will need to cover your retirement expenses.

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 $70,000. Multiply that number by 80 percent ($70,000 X 0.8 = $56,000). So, I will need around $56,000 in retirement to live the way I do today. And if I have expensive hobbies like traveling, I will need a higher number.

Next, figure out how much income you will receive from Social Security. You can contact the Social Security Administration to find out how much will be your benefits at age 62, full retirement age, and at 70. For today, I use the estimated average Social Security retirement benefit in 2021 which is $1,543 a month or $18,516 a year.

Then, subtract your Social Security income from your projected retirement income and you will see how much you need to provide from your savings. $56,000 – $18,516 = $37,484 a year.

So, in our simple case, I will need $37,484 in annual income to cover the income gap. The money to cover that gap should come from 401(k), IRA, Roth IRA, and other retirement savings.

5 Easy Steps to Calculate Retirement Income Gap

Also, you can use an online retirement calculator for retirement projection. Take a few minutes to enter your personal information, see the numbers, and where you stand today.

AARP Online Retirement Calculator

But I think the best way to find out how much money you need to retire is to create a 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 today and how that might change in the future.

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

2. Minimize your debt.

When you are in your 50s make it a goal to pay off your credit card debt, student loans, car 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 a 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. Those high-interest payments can eat away your ability to save. I recommend working on a debt payoff plan if you have more than one credit card.

There are two most popular debt payment strategies – the snowball method and the avalanche method.

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 debt.

How to Pay off Debt Before Retirement

Mortgage

If you still making mortgage payments now it is time to figure out how to pay it off in full before you retire. You do not want to carry that financial burden while living on a fixed income. 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. The whole idea of paying off your home loan earlier will help you eliminate debt faster and start saving more for retirement. In addition to that look into refinancing your mortgage to get a lower rate and to reduce your monthly payments.

When you plan for retirement in your 50s, getting out of debt should be your first priority. At this age, you have to make the most of your working years and build or increase your nest egg within the next 10 to 15 years.

3. Maximize your retirement savings.

Being in your 50s is an ideal time to look at your retirement plans and financial goals. You are close enough to retirement to have a realistic idea of how you want to spend your golden years. Yet you are far away to tweak your financial goals.

charts-laptop-plan for retirement in your 50s

The closer you are to retirement, the less time you have for compound interest to kick in and start working its magic. That is why the ultimate goal in your 50s is to stash as much money as possible in 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 best advice is to start spending less so you can put more money into your retirement savings.

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 may be taxable investment funds if possible.

A Guide to Understanding a 401(k) Plan

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.

4. Spend less and save more for 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 50s enjoy the peak of their salaries. The kids are gone, parents become an empty nesters and start spending more on luxuries. It is easy to get used to a luxurious lifestyle. 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.

15 Ways to Live on Less in Retirement

5. Think about where to live in retirement.

When you are only 10 to 15 years from retirement, you need to think about where you will live because it will affect your living expenses.

houses on lake and mountains -where to live in retirement

Housing is expensive. We all know that it takes a big chunk of our income to pay for property taxes, homeowner insurance, utilities, maintenance, and mortgage. Even with no mortgage payments, housing will be your biggest expense in retirement and it may eat up a big chunk of your retirement income.

I am sure you live in a lovely home. And I know that you love your home and have a lot of great memories of raising your family there. But if it is in a high cost of living neighborhood and expensive to maintain, you need to downsize and move to a place where you can afford it. Otherwise, you will run out of money fast.

There are a couple of housing options to consider before you retire:

  • Sell your big house in an expensive location and move to a smaller house or condo in a low-tax state. In this case, your living expenses will be reduced, and you might have some extra income to pay for things you love to do in retirement.
  • Stay in your town but move to a smaller home or condo. Having a smaller place to maintain will cost you less money.
  • Sell your house and rent an apartment in a big city. But if you want to live closer to the museums, art galleries, concerts, and festivals you should be financially prepared to spend more money because retiring in a booming metropolis can be pricey.

If you want to learn more about housing options, relocating, and downsizing I recommend reading my posts:

6. Protect yourself and those you love.

Planning for retirement in your 50s when retirement is on the horizon, make sure you have insurance plans in place to protect yourself and your family. 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?

young and old women in a park-healthcare in retirement

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.

Putting It All Together

You are in your 50s and feeling the urgency of doing everything you can to have financial security in retirement. If you are behind on your savings and might be feeling the pressure, I want to remind you that it is never too late to start planning and saving for retirement.

The longer you put off dealing with your financial situation, the farther away you will be from your retirement dreams. So, do not delay planning for your next phase of life and take the first step today!

Related Article: Retirement Planning in 5 Simple Steps

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Financial New Years Resolutions for Baby Boomers

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a piece of paper _new year resolutions for baby boomers

Happy 2021! In the spirit of the New Year, I have put together a list of financial New Year’s resolutions for baby boomers.

These financial goals are especially important for people who are planning to retire within the next 10 years. I personally think that the beginning of the year is a great time to start something new and work towards a goal.

Here is the list of financial New Year’s resolutions for baby boomers:

1. Determine how much of the nest egg you will need.

When you are near retirement, it is important to know how much of the nest egg you will need to live comfortably for the rest of your life. How do you figure it out? You have options.

The typical advice is you should aim to replace 70 to 80 percent of your annual pre-retirement income. For example, if you earn $70,000 per year before retirement, you should expect to live off $49,000 to $56,000 per year.

Also, you can use an online retirement calculator. Take a few minutes to enter initial information and then see the numbers, and where you stand today.

Vanguard – Retirement Nest Egg Calculator

Or you can use your current expenses and determine how it will change when you retire.

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 financially for retirement if you have a clear picture of your expenses now and how that might change in the future.

Related Articles:

2. Get a clear picture of your 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: Social Security, pension, part-time job, or rentals (if you have any).

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

Getting a clear picture of your retirement income will help to make sure you have enough money to cover all your living expenses.

To make your assets last through the next 20 or 30 years, use the rule of thumb to withdraw 4 percent of your portfolio annually.

For example, if you have $500,000 in retirement funds, you can spend roughly $20,000 ($500,000 x 0.04) per year when you retire. Add this number to your Social Security, pension, and other savings, and calculate if it is enough to support the retirement of your dreams.

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3. Set a target retirement date.

woman and man walking on the beach - financial new year goals for baby boomers

Another important financial goal for baby boomers who are near retirement is to set a target retirement date. We all need to plan for the day when we are ready to retire or can no longer work.

Based on your target retirement date, retirement income, and what you want to spend in retirement, you can determine if you have enough money saved for your golden years. If it is not enough for a comfortable retirement, move the date, and save more into your retirement funds.

Related Article:

4. Update your budget.

What is your budget? How much you want to save and how much to spend in 2021?

Sticking to your budget can help to know where your money is going. If you want to save more money for your upcoming retirement, begin eliminating some expenses that may not be important to you anymore.

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

Balancing income with your spending plan will help you to save more money for retirement.

Related Articles:

5. Maximize 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.

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

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).

Related Article:

6. Get out of debt before retirement.

Paying off debt, no matter how much you owe, is a key to a stress-free retirement. Getting into retirement with any kind of debt will put a burden on your lifestyle.

The best advice for baby boomers is to pay off all your debts before you retire including a mortgage.

When you are working, you have years of earned income to pay a mortgage, credit cards, student, or any other kind of loan. But once you retire, you will be living on a fixed income.

And when you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, big withdrawals from retirement funds could push you into a higher tax bracket.

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

To pay off all debt including a mortgage might not be realistic for everyone. However, the less debt you have, the better you are prepared financially for retirement.

Related Article:

7. Rebalance your portfolio.

list of 2021 goals - financial goals for baby boomers

The 2020 year has been a volatile year for financial markets. It can be tempting to stay away from stocks to reduce the risk of losing money in your retirement funds.

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

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

You need to remember that a well-balanced portfolio will help you to weather market downturns. Also, it will potentially generate a retirement income to cover your living expenses.

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8. Think about the future medical cost.

Health care is expensive. Unfortunately, many baby boomers forget to include it in their financial plan. Medicare will cover most of your routine health-care costs if you retire at age 65 or older. Unfortunately, it does not pay for all medical bills, and it does not pay for long-term care at all.

Underestimating health care expenses or how to pay for long-term care can be a big financial mistake. Think about your future medical cost and find ways to protect your retirement savings.

Consider buying long-term care insurance which can help to pay for home health aides in your late years. If you buy long-term care insurance now, your premiums will be lower than if you wait several years.

It is recommended by many financial gurus to open a health savings account (HSA).

The money you can contribute to HSA is tax-deductible or pre-tax. And any increase in the value of your account is free from federal taxes. But it has to be used for qualified medical expenses otherwise you will be paying income tax and penalties on your contributions.

The 2021 HSA contribution limits are:

  • $3,600 for individual coverage
  • $7,200 for family coverage

You can put money into HSA every year until you enroll in Medicare benefits. After that, you are no longer allowed to contribute. However, money that you do not spend will be accumulating in this tax-free account until you need it in retirement.

Related Article:

9. Plan where you will live.

Where you will live in retirement could have a big impact on your living expenses. Consider this option – sell your big house in an expensive location and move to a smaller house or condo in a low-tax state. In this case, your living expenses will be reduced, and you might have some extra income to pay for things you love to do in retirement.

You may also consider staying in your town but moving to a smaller home or condo. That will be more financially manageable while living on a fixed income.

But if you are planning to move to a big city you should be financially prepared to spend more money because retiring in a booming metropolis can be pricey.

Related Articles:

Final Thoughts

I know many people do not bother with New Year’s resolutions. But I find them to be very motivating. New Year’s financial resolutions are a great way to take steps to move towards your new goals.

What is your New Year’s resolution? Do you have any financial goals?

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