Retirement income planning can be a complicated process, in which you will attempt to reconcile a new lifestyle with a new budget. The lifestyle part is a subject for another blog, but taking these five steps now can help you prepare for your future budget.
Assess your living expenses. This step will help you kill two birds with one stone. First, by reducing your current expenses you can free up more money to save now, in the last few years before you retire. Second, you will also ease the transition into retirement so that you don’t have lifestyle shock. Assess your spending now, and cut back on unnecessary things like pricey entertainment options or frequent restaurant meals. No one is saying you shouldn’t have any fun, but a gradual transition to your retirement budget will be less stressful than a sudden one.
Get out of debt. For most people, eliminating debt is the best way to reduce monthly expenses. Even if it means working a year or two longer, it is better to enter retirement free of unnecessary debt like your kids’ student loans, credit card payments, and high car payments.
Slash your house payment. For most people, their housing payment is their largest monthly expense. Before you retire, ask yourself if you really need that big four-bedroom house in the suburbs. Can you afford the upkeep, maintenance, and homeowners association fees? Do you live in an expensive area? If you can cut that monthly payment in half, you can enjoy a much roomier retirement budget.
Prepare for health care expenses. Many soon-to-be retirees assume that their health care expenses will remain roughly the same as they are before they retire. That usually isn’t the case, for several reasons. Most of us begin to experience more health problems once we hit our sixties, and Medicare isn’t free. The program also does not cover everything at 100 percent, so you will have co-pays. Medicare supplemental plans help many retirees cover their expenses, but the premiums can add a few hundred dollars per month to your monthly bills. Make sure to include health care expenses in your expected budget, and consider a health savings account now if you’re eligible for one. You could set aside pre-tax dollars to be used for health care expenses later.
Set up an emergency fund. Emergencies can happen to anyone, so having some money set aside in savings is just as important as ever. Make sure you have established a savings account, separate from your retirement income fund, before you retire. That way you won’t be tempted to take extra withdrawals from your retirement income plan and disrupt your plan for distributions.