March 7, 2011 — Earlier this week we received this comment from a member: “I’m planning on retiring in 6 months and my wife is getting worried about having enough money in retirement. I have a good retirement plan, our home is paid off, and we are debt free. My wife also has retirement income. Any ideas on calming some of her fears?”
This question seems so pertinent to what so many baby boomers are going through right now. We can speak from experience here; the shock that comes from retiring and realizing that we are not going to be getting a paycheck anymore is very real. We can’t count on raises or a promotion to fund an ever-expanding lifestyle. Saving money
is probably not an option anymore. In fact, we will be consuming the resources we have previously saved, plus limited other inputs like social security.
We thought that answering this question might be very helpful to people who are on the cusp of retirement. So here goes..
Let’s start by saying that the more information you can put together about your situation, the more you might be comforted. Our member who asked the question appears to be in better shape than most, but we can understand his and his wife’s anxiety over what lies ahead. Even knowing that you don’t have enough money for the retirement you dreamed of is better than the anxiety that comes from not being sure. Here is what we recommend for anyone approaching retirement:
1. Prepare a detailed budget
Your budget should include all of your post-retirement expenses by category – from utilities to your mortgage payment to taxes to your vacation expenses. Many experts say that retired people spend about 85% of what they did during their working days – typically the mortgage is paid off, dry cleaning and clothing and commuting costs are down, and many major expenses have been reduced. However, that won’t be true for everyone. Medical expenses and insurance might be higher in retirement. If you plan on traveling extensively, funding a grandchild’s college tuition, or stepping up your charitable gifts, your expenses might actually be higher. (To help you get started, here is a link to a list of typical expenses that you should copy into an Excel spread sheet)
On the income side here are the typical inputs :
– Pension payment. If you are lucky enough to have one
– Social security. If you don’t know how much you will get already, you can request a statement from the Social Security Administration. Note that how much you get depends on what age you intend to start taking it, a tricky question in its own right (see our article on when to start taking social security).
– Investment income. This is a complex component. Many experts believe that you can safety take 4% of your retirement funds (IRA’s, 401ks, etc) and not run out of money. But if you retire before 60, that might not be true. Retiring after 70 means you might be able to take a little more.
– Other income. Will you be working in retirement, perhaps part-time? Put down all your sources of extra income.
Subtract your expenses from your income. If you are lucky, the difference will be positive. Show the wife (or husband) on paper how your income exceeds your expenses. If it’s the other way around, it’s time to to either cut your expenses or add to your income. Sadly, you won’t be alone: the ERBI reported in its Retirement Confidence Index that fewer than 1 in 5 retirees predict they will have a financially secure retirement.
The most obvious way to cut your expenses is to downsize. Sell that big, expensive house in the suburbs and move to a more efficient, smaller home. Doing that usually means getting cash back that you can generate income on. It also means reduced taxes and energy costs, lower maintenance expenses, and – if you move into town or a 55+ community – fewer miles driven.
A second way to lower expenses is to move to a state with lower taxes and cost of living. The differences in property and state taxes around the country are profound. In general, New England and the Midwest are high on both counts. States like Florida, Tennessee, Texas, and South Carolina are cheaper to live in, and they have a lot lower taxes. It might be enough to make the difference in maintaining the lifestyle you would like to lead, assuming you can live far away from your grandchildren.
Obviously the third way to reduce expenses is to start cutting. Maybe you don’t need that country club. Perhaps your town has a gym, instead of paying for the private one. Take basic cable instead of HBO. Pay off your credit card bill and save the interest. Eliminate your land line or look for a deal that combines cable, phone, and Internet. Maybe you won’t be able to take that luxury cruise, but you can rent an RV or go on an Elderhostel (now called Roadscholar) instead.
Increasing your income
The biggest way to increase your income is to keep working. Maybe cutting your hours from what you do now, but not completely retiring. Or you could turn a hobby into a small business. Take in pets for neighbors, or do handyman jobs or become a hired computer nerd. See our “How to Find A Second Career in Retirement“). Maybe get your real estate license. The extra income you get from working helps 3 ways. One, it gives you more present income to maintain lifestyle. Two, it increases the payout you will get from social security. And 3, it adds to the amount in your retirement account and makes it last longer and pay out more.
2. Most important – get a financial advisor.
Smart people don’t try to be an architect for their own house, or provide their own medical diagnoses. Likewise you shouldn’t just rely on your own financial advice, because a competent financial advisor gives you the benefit of independent, professional expertise. A good one will help you structure your portfolio for maximum performance and safety. He or she will provide helpful advice to help you get your spending and income in balance. In a future article we will write about how to hire a competent financial advisor. In the meantime, start doing your homework. Ask around to see who people you respect are using, and what they think of their performance and professionalism. If you see some free seminars on financial planning, consider attending to learn more.
For further reference:
What to Do if You Haven’t Saved Enough for Retirement
What Is Your Number?
US News: How to Avoid Running Out of Money in Retirement
How Much Can I Spend in Retirement
The Safe Withdrawal Rate (SWR) and Market Timing
What do you think? Please use the Comments section below to tell us what you have discovered about the transition from employed to retired. Your fears and hopes, and all war stories welcomed.