retirement expenses

7 Steps for Managing Money in Retirement

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

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

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

Step 1. Determine your budget.

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

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

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

You can determine your budget around your needs and wants:

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

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

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

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

Step 2. Create reliable retirement income.

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

What are the guaranteed sources of retirement income?

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

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

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

For example,

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

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

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

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

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

Step 3. Cut back on your expenses.

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

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

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

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

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

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

Step 4. Make withdrawals from the right accounts.

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

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

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

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

Step 5. Be smart with your withdrawals.

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

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

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

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

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

Step 6. Look at your home equity.

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

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

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

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

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

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

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

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

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

6 Ways to Fund Retirement Lifestyle with Home Equity

Step7. Rebalance your portfolio for income and growth.

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

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

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

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

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

6 Ways to Fund Retirement Lifestyle with Home Equity

by Maggie Leave a Comment

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

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

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

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

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

What is home equity?

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

How home equity works.

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

$650,000 – $250,000 = $400,000

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

$700,000 – $250,000 = $450,000

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

How to use home equity to fund your retirement?

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

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

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

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

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

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

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

High mortgage rates can be a problem.

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

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

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

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

2. Trade your existing home for something less expensive.

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

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

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

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

3. Sell your existing home and rent.

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

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

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

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

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

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

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

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

Other alternatives to downsizing.

5. Get HELOC or a home equity loan.

There is a proven fact that most people would prefer to stay in their homes and retire in place. They want to remain in their neighborhood for life. In this case, homeownership might provide several options to fund your retirement without the risk of stock market investments.

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

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

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

6. Get a reverse mortgage (HECM).

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

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

There are many benefits of getting a reverse mortgage. It provides you with regular income and does not require monthly payments. You still have to pay taxes and home insurance, and you will be responsible for maintenance. The best part is that you will receive a portion of your home equity in cash without requiring you to move out. However, the loan has to be repaid when the owner leaves the house.

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

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

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

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7 Simple Ways to Pay Yourself in Retirement

by Maggie Leave a Comment

man and woman at the laptop - retirement income plan

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

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

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

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

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

1. Know your living expenses.

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

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

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

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

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

Best Budgeting Apps from Forbes Advisor

2. Calculate your reliable retirement income.

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

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

There are three building blocks to your retirement income:

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

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

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

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

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

3. Pay your fixed living expenses from guaranteed income.

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

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

There are three types of retirement guaranteed income:

Social Security
A pension
An income annuity you purchase yourself.

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

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

Here is a list of essential living expenses:

Mortgage/ rent
Utilities
Transportation
Groceries
Medical insurance

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

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

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

Here is the list of income annuities to consider:

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

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

Retirement Annuities: Know the Pros and Cons

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

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

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

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

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

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

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

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

5. Hatch an RMD plan.

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

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

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

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

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

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

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

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

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

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

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

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

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

7. Stay Flexible.

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

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

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

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

But whatever you do, keep your retirement plans realistic.

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

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2023 New Year’s Resolutions for Baby Boomers

by Maggie Leave a Comment

Happy New Year 2023!

Each new year offers a great opportunity for a fresh start and new beginnings. Setting resolutions is a long-standing tradition. However, only about 10% of people achieve their New Year’s resolutions each year. And many people stop working towards their resolutions after just the first two weeks.

When it comes to finances, 2022 was a challenging year. With high inflation, rising prices on everything, and volatile stock markets ‘2022 was the sixth-most volatile year since the Great Depression’.

Almost 81% of Americans are concerned about their financial New Year’s resolutions and believe that inflation makes it harder to meet their goals.

But making New Year’s resolutions is a great way to change your life for the better. The new year can be a great time to think about what is possible in your near future. Also, the new year is a great time to set some good financial goals. But make sure to set some small realistic goals that will help you work towards larger goals.

Even though we all like to set up new goals and resolutions, different generations have different goals for the new year.

If you are a baby boomer, here are my tips and advice to help you make your 2023 New Year’s resolutions.

1. Eliminate any debts.

Why is it so important to reduce or eliminate debt?

Debt is always a slippery slope because the interest will eat massive chunks of your spending money. The faster you can get rid of it, the faster you can get ahead.

That is why the beginning of the year is a great time to sit down and create a debt payment plan.

There are two strategic and popular methods to get out of debt faster. The Avalanche method helps to reduce the debt that carries the highest interest rate. The Snowball method helps to get rid of debt with the lowest balance first, and then move on to the next lowest one.

The way the snowball approach works is you arrange all of your debts from largest to small ones. Pay off your smallest debt first. Then once the smallest debt is paid off, the money you were paying toward it will be applied to your next smallest debt.

With the avalanche approach, you will start paying off the debt with the highest interest rate and then move to the next highest.

How to Pay Off Debt Before You Retire

Goals to get out of debt:

Identify what debt to pay first.
Set up a debt payment plan.
Consider reducing other expenses to pay debt faster.

2. Increase retirement savings.

Sometimes we do not realize how expensive it will be to retire.

Building a nest egg that allows for retirement income to be close to 100% of pre-retirement income is a hard financial task. Unfortunately, very few people are confident in their retirement savings goals. Most people do not have the proper number in mind, and they forget the impact of inflation on their savings.

In terms of total retirement savings, retirees need to be able to live on no more than a 4% annual withdrawal from their retirement assets. You are not ready to retire if you have minimal savings. Social Security is generally not enough for a comfortable retirement. You will need to keep working and saving more money.

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

Goals to help you save:

Set a monthly savings goal.
Analyze your budget to see how much you can save.
Reduce your spending in a specific category each month.
Save a portion of your paycheck each month.
Increase your contributions to retirement plans – 401(k), IRA, Roth IRA.

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3. Save more for emergencies.

One of the biggest worries about money among baby boomers is that you do not know what will happen in the future.

You do not know if it would be enough to maintain your lifestyle in retirement and if you would not run out of money later when you are in your 80s or 90s.

When you retire, you do not have the security of your job to rely on and have to live on a fixed income. While you cannot exactly plan for the unknown, you can create a backup plan for emergencies.

In general, every household needs an emergency fund to cover unexpected expenses and it should be between 3 to 6 months of household income. But for retirees (in an ideal world) 1 to 3 years of living expenses should be set aside in cash.

Even though your emergency fund cannot cover everything, it can still reduce the money you have to borrow from your family or use credit cards and increase your debt.

The beginning of the year is a great time to put aside extra money into your emergency fund.

Goals for an emergency fund:

Figure out how much you need in your emergency fund.
Create a separate account (money market account, bank savings account, certificate of deposit.
Set up automatic transfers to your emergency fund each month.

4. Create a retirement budget.

Creating a retirement budget, along with a strategy of how you will draw money from your retirement funds is an excellent New Year’s resolution for many baby boomers.

Start by setting up a budget using the amount of money you will have when you retire plus a Social Security paycheck. Do not forget the emergency expenses like home maintenance, car repairs, and medical bills. See if you can live on that budget.

If you cannot, you need to come up with another plan. Think about downsizing if you are a homeowner or relocating to a more affordable area so you can put that extra money into retirement savings.

Think about how much you want to save and how much to spend in 2023. Sticking to your budget can help to know where your money is going. If you want to save more money for your upcoming retirement, begin eliminating some expenses that may not be important to you anymore.

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

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Goals for retirement budget:

Identify your potential retirement income.
Calculate your future retirement expenses by looking at your current costs of living.
Budget with your spouse or partner.
Calculate your net worth.

5. Reduce your expenses.

One of the simplest parts of your financial life to control is spending.

The beginning of the year is a great time to look at your personal spending and set up new goals. 2022 has been full of change and adjustment with many people preferred to work remote. There is a good chance that your spending habits have changed as well.

How did you do last year? Did you get a full picture of your finances and know how much money you have saved (or not) in 2022?

If you struggled last year, decide how to improve your financial situation in 2023.

Look at your credit card and bank statements and see what expenses could be avoided last year, and plan to cut them this year.

Keep in mind, that balancing your income with your spending is the key to saving more money for retirement.

Goals for reducing your expenses before retirement:

Find ways to reduce transportation costs.
Pay off your mortgage or reduce housing costs by downsizing.
Eliminate high-interest debt – credit cards, personal loans, student loans.
Evaluate your insurance coverage.
Figure out where you will live in retirement.

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6. Manage your overall stress and focus on happiness.

We all know that financial stress is not good for our health. Financial anxiety negatively impacts not only our health, but our mood, home and social life, marriage, and ability to pursue our dreams and passions.

Unfortunately, in the current economic climate, it is unlikely that our financial difficulties will disappear overnight. However, it does not mean we have to give up. Perhaps, we need to take small steps to ease our stress levels and focus on happiness and not money.

Everyone’s dream is to have a happy family and be financially secure. So, if you want to be happy and have a secure retirement, try to:

Stop accumulating stuff – Spending money on accumulating stuff does not bring happiness and might put you in debt. Downsize and de-clutter your home, so you can spend more time enjoying your life rather than maintaining it.

Think about experiences – It is a proven fact that you are happier when you spend your money on experiences than on stuff. Accumulating more stuff does not make you happy but doing interesting things do.

Focus on your priorities – Know what is important to you and stop worrying about the rest.

Express gratitude – Be grateful for the good things in your life. It is easy to focus all your attention on the negatives when you are overwhelmed by financial uncertainty and money worries. While you do not have to ignore reality, you can be grateful for many small things in your life. Take a moment to appreciate the beauty of the sunset, flowers in your garden, a gorgeous sunny day, or just a good book.

Find ways to be kind and to help others. These efforts help you see beyond your own financial problems to give something back to the world.

Have you thought about your 2023 resolutions yet? Do you have any financial goals?

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How to Retire Well on a Small Budget

by Maggie 6 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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