How to Have a Good Retirement on a Budget

Article is from the Senior Spirit newsletter.

The concept of a golden retirement is a relatively new idea. It was not until the late 19th and early 20th centuries that workers started getting pensions and lived long enough to enjoy their later years. Before that, people worked until they died.
More recently, we’ve created the ideal vision of retirement: usually a couple living near a beach (probably Florida) where they spend their days swimming, fishing, golfing and eating out with friends. Even though this ideal is unrealistic for most people, retirement can be pleasant if you watch your budget.

Creating a Budget: While figures vary, the general rule of thumb is to plan for a retirement that lasts 20 years, depending, of course, on what age you retire. This can be a long time to stretch your savings. The rule of thumb is that you’ll need about 70–80 percent of your pre-retirement income to live on in retirement, but that depends on your lifestyle and your health.

In creating a budget, experts recommend deciding how much money you need to live comfortably, taking inflation and taxes into consideration. If you are using financial planning software, you may be able to create an estimate of how much your money will depreciate over the next few decades. Even a small percentage of inflation (under 4 percent) will cause you to lose almost half of your buying power over 25 years.
Whether you’re thinking about retiring or have already retired, it’s good to make a budget, figure out what you need and what you don’t. First determine your income, remembering to use all your sources, including a long-term care policy or a reverse mortgage.
Experts recommend being realistic about investments and how much they will increase over time. Because the stock market is not performing as reliably as it once did, the old rule of withdrawing 4 percent a year from your nest egg is far from viable these days for most people. Economists have lowered their long-term projections for the stock market since its downturn. For example, baby boomers’ net household assets, 401(k)s, pensions, homes and other investments, minus their total debt, have lost 18 percent of their value since 2007, according to the Employee Benefit Research Institute.

Controlling Spending: Most retirees can’t control their amount of income, whether Social Security or rate of return on investments or pensions, but they can control spending. To give yourself a realistic view of how much money you need every month and what can be cut, experts recommend looking at your past expenses, usually your bank account and credit card statements for the past last 6 to 12 months. The next step is to list all your fixed or required monthly obligations, breaking them down into three parts:
• Essentials: This includes expenses that cover food, clothing, housing, transportation and health care.
• Non-essential monthly obligations: These include payments for cable TV, cell phone, gym memberships and subscriptions.
• Required non-monthly expenses: Items such as property taxes, insurance premiums, auto registration and home warranties may come up once a year. These expenses should be calculated on a monthly basis and included in your retirement budget.
Next, list all your flexible or optional expenses, such as traveling, hobbies, eating out and so forth. Even if you’ve retired already, you might want to think about your dream retirement, all the things you could do if you had the means. Then, consider how you could reallocate money from current spending.
The last step is to calculate your fixed versus flexible expenses and then total the two. Divide your fixed expenses by your total expenses. This shows you how much of your retirement income is going toward fixed expenses.
Several budget worksheets are available on the Internet to help you keep track of your expenses.

Getting Rid of Unnecessary Expenses.
Financial advisors recommend several ways to save money by removing superfluous expenses.
Insurance: Retirees can save thousands of dollars a year by getting rid of unnecessary insurance policies. You should sit down with your advisor to review your insurance portfolio to determine if there might be ways to reduce your premiums or perhaps eliminate coverage that is no longer needed.
If you’re no longer working, you probably don’t need disability insurance.
Downsizing: If you don’t need the big house, maybe the one you raised your family in, moving to a smaller house or simpler apartment can reduce your expenses considerably. Downsizing can shrink costs for utilities such as heating and air conditioning, as well as for maintenance on roofs, furnaces, yard work and so forth. A smaller home usually means less expensive property taxes. Even moving to a less expensive location can save money.

Debt: More than half of retirees had outstanding debts upon retirement, according to a study by the CESI Debt Solutions. Interest payments can cost thousands of dollars a year, money that you could spend on traveling or eating out. Because debt payments will eat into your relatively fixed nest egg, financial advisors recommend getting rid of as much debt as you can.
Many financial advisors recommend a strategy of paying as much as possible on the highest interest-rate debts first and minimum payments on all other debts until all are paid off.

Investment fees: Financial advisors recommend assessing whether retirees are paying too much in the form of expense ratios, transactional fees and trading and account costs for their investments. Some seniors can cut these fees substantially without altering their portfolios or making significant allocation changes. Managing such costs can save thousands of dollars a year, according to one estimate. One advisor recommends keeping fees as close to 1 percent of the total portfolio as possible.

Phones: Getting rid of either your landline or cell phone can save hundreds of dollars annually. Although most seniors might opt for getting rid of their cell phones, because of concerns about reception, one advisor recommends disconnecting the landline. You can use a cell phone anywhere, and a signal booster can improve reception.

Household appliances: Retirees can save money on their utility bills by replacing older, inefficient appliances and other energy-wasting items, as well as by improving their home’s insulation. Many utility companies offer free or discounted home energy audits to help homeowners and renters assess their power usage. One expert estimates that homeowners can save as much as $500 a year in energy costs after making recommended changes. Further, many states and utility companies now offer rebates for purchasing more energy-efficient appliances, such as refrigerators and air-conditioners.

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