Retirement and Spending: A Co-Dependent Relationship

Whether you are 25 or 65 your retirement has been affected by the current economic downturn. People in every financial class have lost a significant amount from their financial portfolio. Most people are afraid they’ve lost too much money to retire early or even on time. It’s important to realize that when you can afford to retire depends almost as much on your expenses as on the amount you’ve saved.

In the early years of retirement when you’re active and healthy, your expenses might actually rise instead of fall. You may travel more, and spend more on costs that had previously been subsidized by your employer such as health and life insurance.

Although some of your costs may go up others will vanish in retirement. No more expensive three piece suits for work, no commuting expenses, and no dinners out because you’re too tired to cook after a long day at the office.

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Below is a list of six other expenses you can cut back on in retirement. Careful planning is the key.

1. Reduce Investor Fees

Even after you retire, it can pay off to seek out investment options with lower expense ratios and fewer fees. Cutting the management and investment fees charged by your retirement funds can add a lot of money to your nest egg without sacrificing any of your investment goals.

Perhaps you have a 401(k) plan through your employer. Or perhaps you’ve rolled over such a plan into an IRA or other self-directed retirement account. The odds are good that most, if not all, of your investments are charged steep fees and expenses.

Every professionally managed investment charges a fee. The problem is they are largely invisible to investors. You may be under the impression you are not being charged any fees because they don’t come under familiar terms like management fee or transactional fee or they don’t list them on your account statements. Buy trust me they are there, typically they are explained in such seldom read sections as investment prospectuses.

It’s best to keep total fees at 1% or less of your total portfolio. If you are paying more than this ask your investment advisor for a fee reduction or find a fee-only advisor. Do not despair, investments with lower fees are generally easier to find in retirement because investors tend to allocate more assets to low-fee fixed-income products as they age.

2. Downsize Your House

Consider downsizing to a smaller home or condo and padding your nest egg with the extra income. A four to five bedroom home in a good school district may have been important to you years ago but when you retire the costs associated with larger homes often outweigh the benefits.

Even retirees who no longer have a mortgage can benefit from downsizing their home. Living in a smaller house can shrink costs like air conditioning, utility bills, maintenance, and upkeep. Smaller homes are typically assessed at a lower tax rate, reducing homeowner’s costs across the board.

It may be a good idea to look into a reverse mortgage as well. A reverse mortgage is a type of home loan that allows you to tap into the equity in your home and convert it to income for your family. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrowers no longer use the home as their principal residence. This can supplement your income and insure your children don’t have to support you as you age.

3. Get Rid of Unnecessary Insurance

Retirees can save thousands of dollars a year by getting rid of unnecessary insurance policies. The purpose of insurance is to make sure that if something happens to you, the other people in your life-like your children or spouse- who depend on you for financial support, will be taken care of if you die prematurely.

If you’ve retired with savings, investments like a 401k or IRA or have a pension, chances are good that your heirs will probably be just fine without insurance. Add social security payouts into the mix and you can be assured your income streams should be enough to support him or her for many years to come.

Simply ask yourself what the financial loss would be for your family if you die and how much is that worth.

4. Find age-related tax breaks.

Do you know about the unbelievably long list of medical deductions – such as modifications to a home for the disabled, mileage for doctor visits, hearing aids, acupuncture, new glasses, and contact lenses seniors can claim on their taxes? A tax preparer will not always ask you the right questions to make sure you are claiming all possible deductions. Be your own best advocate.

Also look into your state’s income tax rules. Some states exempt pension income from state income tax. Other locales offer age-related property tax exemptions or deductions. Contact the state department of revenue or a local tax expert to find out about tax breaks for seniors.

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5. Reduce entertainment costs

Sometimes seniors actually increase their spending on entertainment in the early days of retirement. Suddenly you have all this free time to do the things you’ve always wanted to! Retired workers have an extra 2,000 hours of free time they didn’t have before. It can cost more money than you anticipated filling up that time. Try not to take up new expensive hobbies in retirement. Don’t suddenly start playing golf or antique shopping just because you have the time to now. Come up with a plan to volunteer, garden, and look for free entertainment to avoid overspending in this category.

6. Eat out for less.

Seniors are famous for taking advantage of the early bird discounts most restaurants offer to customers who dine before peak dinner hours. Eating out is many times as much about getting together with friends and family as it is about seeking nourishment. If joining friends or family is the reason for the trip, consider alternatives to lavish dinners out.

One option is to meet for lunch instead of dinner. Most restaurants offer their dinner menu in smaller portions and smaller prices during the day. You can enjoy your friends or family in the same wonderful atmosphere with the same delicious food, while saving money with a much lower dent in your retirement dollars.

You could alternatively meet for coffee instead of a full meal. A latte and a pastry cost less than most full meals.

If evenings are your preference consider filling up at home first and purchasing only appetizers or desert. Enjoy a simple salad at home and then splurge by splitting a few appetizers or a decadent dessert, followed by coffee or after dinner drinks. The best part of the meal is at your favorite restaurant, where you can relax and leisurely enjoy the atmosphere and the company.

Keeping Money In Your Pocket,

Nancy Patterson


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