How to Start Reducing Your Expenses before you Retire

Downsizing Your Expenses Can Provide a Realistic Path to Retirement

Downsizing your biggest expenses before retirement. Frye Design Ltd./Getty Images

It’s not surprising to find out that nearly three out of every four people seeking financial planning guidance select planning for retirement their top priority. As  retirement nears, priorities and goals are likely to change somewhat as you make the transition. That’s why it’s so important to have a financial plan in place to adapt to these changes.

Fear and uncertainty can become a driving force of emotions during retirement planning conversations.

  According the 2015 State of U.S. Employee Retirement Preparedness report from Financial Finesse, only 29 percent of 55 to 64 year-olds express confidence that they will have enough to replace their current lifestyle expenses during retirement.

If you are planning on retiring in 10 years or less you should already be running a basic retirement calculation at least once per year to see if your projected retirement savings will be enough to meet your income goals for retirement.

The creation of a budget plan for retirement is suggested if you are 5 years or less away from your planned financial freedom date. If you’re not on track, you either have to find ways to increase your income through saving more, working later in life than desired, investing more aggressively, or generating extra income in retirement in other ways (part-time employment, reverse mortgage, rental income, etc.).

Another option to bridge a potential cash flow gap in retirement is to reduce your planned retirement expenses.

We often think of downsizing our home as a potential money saver for retirement, but there are other ways to downsize your lifestyle that could be just as effective.

If you are considering downsizing various aspects of your financial life prior to or during retirement, here are some things to consider:

Put your retirement spending plan to the test.  First of all, make sure you actually have a budget or personal spending plan in place and put your plan in writing.

This will accomplish a few things. Knowing where your money is going today will help you estimate your planned expenses during retirement. In fact, you should try to do more with your retirement calculations than just attempt to replace a certain percentage of your current income. Create a budget plan for retirement that estimates the expenses you anticipate changing during retirement so you have a dollar amount set for your income goal.  One final benefit of putting your budget to the test is to see where you can free up some extra dollars today to increase your savings for retirement. You will be giving your retirement nest egg a much needed boost and reducing future expenses at the same time.

Deal with potential health issues now. If you are concerned about rising health care costs you aren’t alone. You can reduce out-of-pocket health costs if you take steps to better maintain your overall health. Managing personal finances is similar to managing your overall health and wellness. Most of us usually know what to do, but the hard part is taking action and following through with the steps needed to proactively improve our health and well-being.  (See Ways to Save on Healthcare Costs in Retirement)

Reduce your transportation costs.  If you have been making car payments throughout the majority of your career you’ve probably assumed car payments are just a fact of life.

Yes, it’s true that most of us need a car to get to work or manage normal everyday routines. However, if your car buying history includes replacing your vehicle every 3-5 years with a brand new automobile you could be adding an additional expense to your retirement plan.  Buying reliable used vehicles and establishing a car replacement fund prior to retirement are alternative strategies to consider.

Eliminate High Interest Debt.  If you have high interest consumer debt (credit cards, personal loans) it usually makes more sense to pay off this debt with extra dollars from your spending plan. One major exception is when you anticipate the growth of your investments to be higher than the interest you are paying on the debt. Of course, stock and bond market returns don’t come with any guarantees whereas the interest saved in a debt reduction strategy is guaranteed.

 

Avoid the temptation to use a lump sum withdrawal from your retirement account to pay off high interest debt.  The income taxes that will be due are often times significantly higher than the interest savings from this financial move.

Strategically pay off your mortgage. In general, it is a wise financial move to time your mortgage payoff with your planned retirement. However, with interest rates at historically low levels this decision isn’t as easy for some people to make. That being said, with housing expenses being one of the biggest household spending categories during retirement it can be quite beneficial to become mortgage debt-free.

Re-evaluate your insurance coverage. Some expenses such as long-term care and health insurance will remain necessary throughout your retirement years.  However, other insurance needs may be reduced or eliminated once you retire. As retirement nears, obtain an objective assessment of your recommended life insurance coverage amounts. Ideally this assessment will be conducted by a financial professional who is not compensated for recommending one particular product versus another or holds a financial interest in you continuing to make premium payments.

Avoid student loan debt prior to your retirement (unless your retirement is still on track).  If you feel like there is no other way to fund your child’s education expenses - think again. You can borrow for your child’s education but not your own retirement. But this doesn’t mean you have to take out parental loans. If you do, be prepared for the consequences. If parent student loans cannot be avoided, try to time your payoff with retirement.

Seek advice before making important decisions. Downsizing should always be seen as an ongoing process that is needed during your working years and throughout retirement. Look at it as a chance for a much needed financial check-up as you try to identify expenses and habits in your life that you can change. If you are working with a financial professional, be sure to use your downsizing exercise as a reminder to set up a plan to eliminate debt and move on to a check-up of other important retirement factors such as savings, investments and estate planning.

Take time to define what “retirement” means to you.  Downsizing has its advantages and does not necessarily mean you have to compromise your most important goals for retirement. In order to make the right decision when reducing your expenses you need to have a clear understanding of your life goals, values, and vision for the future.  Undergoing a comprehensive review of your alternatives will allow you to better define what financial freedom truly means to you.  This downsizing process may even provide you with a clear path to get to that retirement destination sooner than expected.