When planning for retirement, in many ways successful planning is a matter of projections. How much money will there be coming in and for how long? How much money will be going out in expenses and how might those expenses grow over time? Unfortunately, far too many people have no real understanding of what their incomes and expenses might look like after they reach retirement age at 65.
Last month, the Social Security Administration released a report that will help those who haven’t gotten a grasp of their retirement budgets. The report, entitled Expenditures of the Aged Chartbook, examines the expenses of those over the age of 55, placing emphasis on the expenses of those over the retirement age of 65.
The report can be helpful to those of us still planning for retirement by providing insights and ideas that will encourage proper retirement planning based on facts and statistics.
Retirement Housing Costs Are a Budget Killer
Perhaps the most important finding in the report is the stress that housing costs put on retirees. Housing was by far the most expensive component of a retiree’s budget, accounting for more than one third of the average retiree’s expenses.
The report shows that housing accounted for 35% of retiree expenses. The next closest categories were transportation (14%), healthcare (13.2%), and food (12.3%). As you can see, housing costs are nearly as expensive as the next three highest categories, meaning it is necessary to focus on and contain these costs as much as possible when planning for retirement.
When digging deeper into the data it can be seen that housing expenses will differ depending on a person’s age, their income and the source of that income. No matter how you analyze the data however, it is apparent that housing costs are a retiree budget killer.
Now, what can be done to minimize housing expenses in retirement and contain the effects of this budget killer?
Retire Debt Free
One way to significantly reduce your housing costs, before retirement as well as after, is to own your home outright, with no mortgage or other debt obligations. I’ve often said that eliminating debt is important and this is one specific example where eliminating your mortgage and other debts can benefit you.
In addition to the benefit of eliminating your mortgage payment, owning your home outright can also help your income if you choose to use your home as a source of capital through a sale or a reverse mortgage once you retire.
Don’t ignore other debts either. Any loans, credit cards, and debt obligations should be eliminated before retirement. Preferably, you should strive to eliminate debts now though, and live your life without the extreme burdens that borrowing and debt places on many Americans.
Don’t Ignore the Effects of Inflation
One area that many retirees may overlook are the effects of inflation such as rising property taxes and the increased cost of maintaining a home over time. With average life spans rising, these expenses can increase dramatically over the course of a 20-30 year retirement. With housing being by far the largest expense in a retirees’ budget, it is also the expense that is likely to grow the most as inflation hits.
According to many financial planners, maintaining your home during your golden years can be just as important as maintaining your body. Keeping your roof and foundation in good shape is as critical as maintaining your heart and monitoring your diet.
Likewise, planning for rising property taxes makes good financial sense. Just as rising healthcare costs can eat away at your retirement income, rising property taxes can also take a huge bite out of a shrinking retirement apple. Taxes are almost certain to rise and must be factored into your retirement plans accordingly.
Consider Relocating in Retirement
Another valid strategy for combating the rising costs of retirement housing is to consider relocating to help keep housing costs low in your retirement. While your current home may have been suitable for you when you were raising a family, there is a good chance that it is now unsuitable for your future financial needs. Don’t jeopardize your financial stability over nostalgia.
By downsizing to a more senior friendly home, you can save on higher taxes, home maintenance costs, heating and cooling costs, and will free up cash that can be better utilized through investments that generate usable income. In addition, a smaller home is more manageable for seniors and is often safer as well.
The best news is that even if you change your home to downsize you can still stay close to family and friends and continue to keep the same doctors, churches and other community activities and businesses you are accustomed to. Making a move like this may require some courage on your part, but in the long run it will better support your reduced retirement budget. Many of us consider a house as an investment, but for cash strapped retires it is an illiquid and impractical investment.
This is especially true if you are still carrying a mortgage at retirement. By selling and downsizing you are guaranteeing a rate of return that is at least equal to the interest rate you are paying on your mortgage. You also free up cash that can generate investment returns or help fund your current retirement income needs.
Save As Much As You Can Now
With the SSA report painting such a bleak picture of retirement it is important that we do all we can now to prepare for a golden retirement. With the report stating that 73 percent of retirees spend less than $25,000 a year we may believe they are a frugal group, but in many cases the frugality is mandated by their poor financial and retirement planning.
If you are still in your 20s you still have time. You should begin by ensuring that you are saving 11 percent of your gross income at a minimum. Those in their 30s may need to double that amount. And if you are in your 40s or 50s you may need to take drastic measures now, or plan to continue working far past the age of 65. In every case, retirement savings should be placed in tax deferred accounts such as IRAs and 401(k)s to take advantage of the tax benefits of these vehicles. In addition, funds in these retirement accounts should be in low cost funds meant to mimic the performance of the overall market.
If you currently feel ill equipped to deal with the budgeting and planning aspects of preparing for retirement there are options. Since you are reading this now, one of your options is to continue learning from whatever sources are available to you, be that the internet, your local library, or workshops and seminars in your community. Or if you prefer to let the professionals handle the planning for you, consider finding a fee only financial planner through The National Association of Financial Planners. Either way, you will be glad you did it and can retire more comfortably and financially sound.