You’ve done your homework and discovered that your retirement expenses are going to exceed your retirement income. What can you do now? Quite simply, you are going to have to figure out a way to increase your income and/or reduce your expenses. Here are some ideas to get you started:
1. Postpone your retirement. While you might like to retire at a particular age, this may not be realistic given the high cost of retirement. You may need to postpone retirement and continue working a few additional years to allow yourself time to save more. The longer you work, the longer you have to save for retirement. And working longer also means a delay in when you start drawing on your retirement money. It may also increase your retirement benefits if your salary rises in those years. Another alternative to consider is working part-time after you retire.
2. Have your spouse continue or start working. Another option is for your spouse to continue or start working, either full or part-time.
3. Bank your pay raises by maintaining instead of increasing your standard of living. The truth is that there are millions of people who don’t make a lot of money and retire comfortably. And there are just as many people who earn substantial salaries, but who haven’t saved enough money for retirement. The key is learning to get by with a little less, so you can save more. One technique for saving is to bank or save your pay raises or bonuses. Whenever you receive a raise or bonus, put the extra money into saving for your retirement, rather than spending it.
4. Move to a less expensive residence. Consider moving into a smaller house or apartment to save on your retirement expenses. At the very least, the move should lower your living expenses, permitting you to put the difference into savings. If you have a significant amount of equity in your home, you might have money left over from the sale that you can then plow into savings. If you have owned and used the home as a principal residence for at least two of the last five years, single taxpayers can exclude up to $250,000 of capital gain on the sale of the home, and married taxpayers filing jointly can exclude up to $500,000.
5. Move to a less expensive geographic area. Another alternative is to move to a less expensive geographic area. If you live in an area with a high cost of living, look into areas that are cheaper to live. Some things to consider when looking at different areas are housing costs, food costs, state income taxes, and the like. You may be able to live just as comfortably in another area of the country for a lot less.
6. Reduce your debt. Lower your debt as best you can especially before you retire. Reduce your debt – and your interest payments – by eliminating the debt with the highest interest rates first. Since credit card debt usually carries the highest interest rates, organize your credit card debt from the highest to the lowest interest rates, and pay off the card with the highest interest rates first. Once you’ve paid off the credit card with the highest rate, move on to paying off the credit card with the next highest interest rate. Continue doing this until you have all of your credit cards paid off. Once you’ve paid off all of your credit cards, look at whether it makes more sense to pay off other debts such as a car or a mortgage or to invest that money. This will depend on whether the rate of return you can get from investing the money is higher than the interest you must pay on your debt. Seek the advice of a financial advisor to help you determine what’s best for your particular situation. In general, of course, less debt is good. If you can start your retirement with no credit card debt, no car loans, and your mortgage completely paid off, you’ve come a long way in preparing for your retirement.
7. Take a hard look at your insurance. Examine all of your insurance policies and ask yourself two questions whether you need the insurance, and if you do, whether you are getting the best deal possible. If you have life insurance policies on your children, for example, consider getting rid of those policies. Generally, there’s no reason to have such policies on your children. For homeowners insurance and car insurance, shop around for the best deal. You may also want to speak with your insurance agent about whether it makes sense to raise the deductible amounts on these policies to lower your premiums.
8. Consider not having taxes withheld on your pension payments. Once you are retired, you can choose whether you want to have taxes withheld on your pension check, or whether you want to make a quarterly payment to the IRS for your estimated taxes. By having taxes withheld, you are essentially giving the IRS an interest-free loan on your money. Instead of letting the IRS use this money, you could have it earning interest for you in your account. If you want to pay estimated taxes instead of having the taxes withheld, sit down with your tax preparer and have them calculate how much you’ll owe. You’ll also want your tax preparer to prepare voucher slips with the correct dollar figure on them so you know exactly how much to send in to the IRS each quarter. The downside of going the estimated tax route instead of the withholding route is two-fold. First, it will require a little extra work on your part to calculate and mail in the quarterly payments. Second, you’ll need to plan ahead so that you have enough money budgeted for your estimated taxes each quarter. But again, the advantage of making the estimated payments is that you get to hold onto your money for longer and earn interest on it.
9. Look at all of your expenses such as a second car with an eye towards eliminating some of them. Again, retirement planning is not particularly complicated. It’s a matter of making sure your income will cover your expenses. If it won’t, take a hard look at each of your expenses to see if you can eliminate or reduce some of them. For instance, do you need a second car? If you can do without, you will not only rid yourself of a car payment (if you have one), you’ll eliminate the insurance costs and taxes that come with owning that car. You may want to consider moving to an area that offers convenient public transportation, so that you can manage with just one vehicle. Naturally, determining what expenses you are willing to cut and what expenses are essential is a highly personal decision. But the point is, when you examine your expenses, go through them one by one and think about each one carefully to see if there’s any way to reduce or eliminate it. You may surprise yourself with some creative solutions.
10. Plan to draw down your savings. In some circumstances, you may want to consider drawing down your retirement savings over a lengthy period of time. The most conservative approach to retirement planning, of course, is to plan to leave your nest egg intact and live off of the income generated by the savings. For those who do not have enough of a nest egg saved to live off of the income, though, the conservative approach may not be a practical approach. If drawing down your retirement savings is something you think you may have to do, you should definitely seek the advice of a competent financial advisor before you begin. This is not a calculation you should try to make on your own! There are significant risks associated with this strategy such as depleting all of your retirement savings in your old age. This is an option, but it is generally used as a last resort. Consult with your financial advisor first!