Conventional retirement wisdom is that you will need less income in retirement to support your lifestyle than you need during your working years. Many retirees use an arbitrary figure, such as 75 percent or 80 percent of pre-retirement income, to estimate their needs during retirement.
However, these quick estimations aren’t always accurate. Every person’s plans for retirement are unique and personal. If you plan to be a homebody and enjoy your newfound leisure time, your income needs could go down. On the other hand, if you plan an active retirement of shopping, dining out and traveling, you may find that your cost of living stays flat or even slightly increases.
An effective way to project your income needs is to develop a budget. Estimate all of your fixed expenses, such as your mortgage, debt payments and utilities, as well as discretionary costs, like dining out, shopping and entertainment.
Add up those expenses and then compare the total with your projected income in retirement. If your expenses are greater than your income, you have a gap. You’ll likely need to cut your costs to retire comfortably.
There are plenty of ways to cut small costs. You could make your coffee at home instead of going to Starbucks. You can cook more and eat out less. Those small savings add up.
But what if you need big cost reductions to overcome a sizable gap? What steps can you take to make a dramatic improvement in your budget? Below are three ways to reduce your costs by a large amount and erase even the biggest of gaps:
Downsize your home.
If you’re like many retirees, your home is one of your most valuable assets. It can also be one of the largest sources of expense. Even if your mortgage is paid off, you could still have expenses like utilities, homeowners association fees, insurance, taxes, maintenance and more.
You could reduce or even eliminate some of those costs by selling your large home and moving into a smaller one nearby. You’ll have reduced taxes, insurance and even utilities on a smaller, less valuable home. You may not have any HOA fees. And the maintenance requirements may be reduced.
Better yet, you may be able to cash in some of that equity in your current home and add it to your savings. That could improve your ability to generate retirement income.
Go to one car.
You and your spouse may have needed two cars when you were both working and shuttling kids around. But what about now that you’re both retired and the kids have long since moved out of the home?
By going down to one car, you could eliminate a car payment, cut your insurance payment and reduce costs for things like fuel, oil changes and other maintenance. Plus, with the rise of Uber and other ride-sharing services, you may have plenty of affordable alternatives if the sole car is unavailable.
Many retirees assume that Medicare will cover all of the medical expenses. While Medicare is a helpful tool, it doesn’t cover everything. In fact, Fidelity has found that the average 65-year-old couple will pay $245,000 out of pocket in retirement for things like premiums, copays, deductibles and more.1
You can reduce that number by getting healthier. Exercise regularly. Eat a healthier diet. Drop unhealthy habits like smoking or drinking to excess. The healthier you are, the lower the chances that you will suffer serious injury or illness. Invest in your own health today to limit your health care costs in the future.
For help developing your budget, contact us at Coventry Financial in Scottsdale, Arizona. We can identify areas to reduce your spending and help you implement a plan for financial stability in retirement. Let’s connect today.
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15848 – 2016/6/27