How to Start Reducing Your Expenses Before You Retire
Downsizing your expenses can provide a realistic path to retirement
It's no surprise that most people seeking financial guidance select planning for retirement as a top priority. As retirement gets closer, financial priorities can shift and it’s 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 to the 2015 State of U.S. Employee Retirement Preparedness report, only 29% 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, running a basic retirement calculation can help you to see if your projected retirement savings is enough to give you the freedom to retire.
The creation of a budget plan for retirement is suggested if you are five years or less away from your planned retirement date. If you’re not on track, you either have to find ways to increase your income or eliminate costs before retirement. You might save more money, work later in life than desired, invest more aggressively or generate extra income through part-time employment or rental income.
Reducing your planned retirement expenses can bridge a potential cash-flow gap. Downsizing your home has the potential to save you money in retirement, but there are other ways to downsize your lifestyle that could be just as effective.
If you are considering eliminating expensive 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. Knowing where you're spending your money today will help you estimate your planned expenses during retirement.
With a spending plan, you can free up some extra dollars to give your retirement nest egg a much-needed boost and reduce future expenses at the same time.
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 for a more accurate income goal.
Deal With Potential Health Issues Now
If you are concerned about the rising cost of health care, you aren’t alone. According to CNBC, annual health care costs are expected to exceed $285,000 for a couple retiring in 2019. You can reduce out-of-pocket medical costs by taking steps to better maintain your overall health. Take action now and follow through with the steps needed to proactively improve your health and well-being.
Reduce 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, you don't need to replace your vehicle with a brand new one every three to five years. Buying reliable used vehicles and establishing a car replacement fund prior to retirement are alternative strategies to reduce transportation costs.
Eliminate High-Interest Debt
If you have high-interest consumer debt such as credit cards or personal loans, it usually makes sense to pay off this debt with extra money 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 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 you'll pay are oftentimes significantly higher than the interest savings from this financial move.
Pay Off Your Mortgage
Housing expenses are one of the biggest household spending categories during retirement. Become mortgage debt-free to reduce your expenses and give you the freedom to retire. Another alternative to paying off a mortgage prior to retirement is to consider a reverse mortgage.
Evaluate Your Insurance Coverage
Some expenses such as long-term care and health insurance will remain necessary throughout your retirement years. However, you might be able to save on life insurance. 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.
Avoid Student Loan Debt Before Retirement
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 for your own retirement. But this doesn’t mean you have to take out parental student 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
Seeking professional advice should be seen as an ongoing need during your working years and throughout retirement. Look at it as a chance for an objective 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 ask about setting up a plan to eliminate debt. Other important areas to check-up on for a smooth retirement include savings, investments and estate planning.
Define What Retirement Means to You
Downsizing your spending has its advantages, though it does not 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 finances will allow you to better define what retirement means to you. This process may even provide you with a clear path to get to that retirement destination sooner than expected.