Make your retirement dollars last!

Wednesday, August 25, 2010
By Sara Moore

Once you retire, it’s natural to worry about your finances. Here are 12 tips to help you budget your money so it lasts you throughout your retirement from co-author Eric Tyson of Personal Finance For Seniors For Dummies.

Use the 4 percent rule
Since many retirees need to live off a portion of their investment portfolio’s returns, the 4 percent rule should comes into play to make your money last. Your portfolio should last at least 30 years if you withdraw about 4 percent in the first year of retirement and then bump that amount up by a few percent per year for increases in the cost of living.

Save no more!
After you retire and stop earning employment income, one of the cash outflows that should go away is saving more money. “Some folks early in retirement continue to effectively save by not using all the money coming in,” says Tyson. “For example, from Social Security, pensions, and so on. They scrimp and save and do without when they don’t need to. If your retirement analysis shows that you don’t need to save anymore, then don’t. Use that income; after all, you’ve earned it!”

Consider supplementing your income with a reverse mortgage
If you own the same home during most of the decades of your adult life, you probably will have some decent equity accumulated in it. You may wish to tap that equity to supplement your retirement income. A reverse mortgage enables you to receive tax-free income through a loan on your home’s equity while still living in the home.

With reverse mortgages the lender pays you, and the accumulated loan balance and interest is paid off when your home is sold or you pass away. Here are the basic standards for eligibility:

*You, the homeowner, must be at least sixty-two years of age.
*You must use the home as your principal residence.
*You must have any outstanding debt against the home paid in full.

“Retirees we speak with who have taken a reverse mortgage generally say it has been a good experience for them,” says Tyson. “They often cite that the extra income allowed them to keep up a home’s maintenance, pay medical and other costs, avoid having to scrimp so much on things like eating out sometimes, and gain peace of mind not having to make house payments. However, reverse mortgages aren’t free of their downsides. The effective interest rate can easily jump into the double-digit realm if you stay only a few years into the loan. So as with any financial decision, do some research to determine if it is right for you.” (For more information on reverse mortgages, visit the AARP ebsite at

Consider inflation throughout your retirement
When calculating inflation, use three percent per year because this is what consumer price inflation in the U.S. has averaged over many years. So plan accordingly by considering your current spending and your spending in the years and decades ahead.

Prepare for increased healthcare expenses
Most people end up spending more on healthcare during retirement. The average American over the age of 65 spends about $7,000 per year, and costs rise faster than the overall rate of inflation. Even if you’re in good health, you’ll probably visit the doctor more and undergo more frequent routine and preventative testing. You should also expect an increase in how much you spend on prescription drugs and dental and vision care visits and procedures.

“Don’t be confused about what your former employer will cover in terms of healthcare and what Medicare will cover,” says Tyson. “The reality is that in retirement, you’re on your own for a great deal of your medical expenses and for long-term care. A reasonable estimate of your different health expenditures and how they’ll be paid or insured needs to be part of your retirement plan. Important factors to consider will be Medicare, Medicaid, and long-term care.”

Start saying no to the taxman
One fringe benefit of ceasing work and getting over the financial impact of losing that income is the associated and often dramatic reduction in income taxes—both federal and state—as well as FICA (Social Security and Medicare) taxes and possibly local taxes. However, even though you’re retired, some of your taxes may actually increase or stay the same. Keep close tabs on the following taxes:

Taxes on Social Security benefits
Pay close attention to the triggering of taxes on Social Security benefits if your income exceeds particular thresholds. If you’re working part-time in your retirement, you may want to consider contributing to a retirement account to reduce your taxable income.

Property taxes
Many communities offer some seniors the ability to postpone property tax payments and offer reduced tax rates for low-income seniors. To qualify, you typically have to present a copy of your completed IRS Form 1040 each year. Options offered usually include abatement (reduction), deferment, or freeze.

Reduce the amount you spend on housing
Many retirees are able to enjoy and benefit from the fact that they no longer have mortgage payments in retirement. There are many ways to manage and even reduce your housing expenses during retirement. You simply have to consider your options and choose which might work best for your circumstances. “Some retirees have attachments to their homes and don’t want to move, while others don’t mind downsizing or moving to a lower-cost area,” says Tyson. “Some would never consider taking on a tenant or opting for shared housing, while some, especially those who have been widowed, might find the social aspects of those situations appealing. Each person’s situation and preferences are unique, so we advise that you explore your options and select the choice that feels right for your situation money-wise and comfort-wise.”

Reduce utilities costs
Since changing the energy and communication sources you’re using in your home or car isn’t a simple matter of course for everyone, there are other options. Reduce your garbage bill by recycling more and creating a compost pile for biodegradable trash. Slim your water bill by installing water flow regulators in shower heads and faucets. Install a water purification system instead of buying bottled water. Bundle your television and Internet with your phone bill.

Carefully plan your food budget
Prepare more meals at home and eat out less. Buy grocery-store-brand products, whose quality and ingredients are often the same as higher-cost name brands at a much lower price. If you do eat out, go out for lunch when prices are cheaper, get the early bird special, or order take-out — all cheaper options than normal restaurant dining.

Consider getting rid of your car
Since you’re no longer working, you don’t have a commute and its associated expenses, including gasoline, maintenance, tolls, public transit fees, parking charges, etc. Your car should also last longer because you won’t be driving as much. You can also reduce the number of cars you own or you can get rid of your car and take public transportation, which eliminates auto insurance expenses. If you need a car for a weekend or other excursions, you can rent one for the day or by the hour for local driving.

Manage your personal care expenses wisely
Spending on clothes, shoes, jewelry, dry cleaning, and other amenities also take a tumble when folks retire from jobs, especially those who worked in more formal office settings. You also will likely spend less on haircuts and salon treatments. “It’s important to remember, though, that you shouldn’t skimp on taking care of your health and being physically active,” says Tyson. “Consider joining a health club or gym that’s user-friendly for folks of your age and interests. Of course, you don’t need a gym membership to be active. Walking, hiking, and other outdoor activities are low-cost and generally healthy. Just be careful about falls, which become increasingly common as we age. By staying active and healthy, you can help reduce your overall healthcare spending.”

Don’t be afraid to indulge responsibly
Being able to travel, relax, and have some fun is what retirement is all about. You’ve worked for decades and now is your chance to kick back a little. Don’t feel guilty about spending a bit more on travel and entertainment, especially during your early retirement years. As long as it is within your budget, you are good to go. “Most folks don’t travel much later in retirement due to reduced mobility and increased health issues,” says Tyson. “Keep that in mind in the earlier years of retirement and be sure to take advantage of your mobility and money while you’re able. During your retirement years, you can save money on entertainment and travel expenses in a couple of easy ways: travel during off-peak times or benefit from reduced senior prices.”

“Retirement spending will take some getting used to,” says Tyson. “You’ll be spending more in some areas while easily decreasing what you spend in others. But as with most aspects of retirement, with a little planning and the wherewithal to stick to your budget, you will be able to manage your expenses efficiently while enjoying the best parts of the retirement life.”


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