There is always a lot of conversation about saving money for retirement, but talk about how much you need tends to fall in big sweeping percentages or large numbers that may feel unattainable today. It used to be that $1 million was the cool number, now they’ve increased that – but nobody will say to what.
The other number thrown around is 70% of your current income will be how much you’ll need annually in retirement, but, again, they never really tell us why. And let’s face it, we all live differently now; how do “they” know what we might need.
Let’s talk about our lives and the assumptions made.
Assumption #1: your home is paid for. In your 60’s, the assumption is you invested in your home in your 30’s, so your mortgage should be paid off. That works if you’ve followed a traditional path.
Traditions have been thrown out the window lately. If your 30-year mortgage won’t be paid by the time you reach retirement age, it might be time to refinance to a shorter term (only do this if your interest rate will significantly decrease) or increase the payments you make now.
Mortgages are amortized over a set period of time, if you pay timely and consistently, your mortgage will take as long as you signed up for. If you pre-pay, you can significantly lessen the interest amount paid and the length of term. No modifications are generally needed. Just be sure if you add additional amounts to your mortgage payment that you specify them as principal payments. Mortgage companies set their rules up to assume extra payments go into your escrow account (for taxes and insurance) unless you tell them differently.
Assumption #2: your commute is diminished.
The financial advisors still have most of us working a traditional job where we commute “downtown,” not to our living rooms or shops. With a commute comes auto expenses that are expected to lessen. If you don’t have that kind of commute now, you won’t save money on auto expenses when you quit working.
Assumption #3: the rest of your debt is completely paid for.
This should be the goal. Being burdened with excess debt is a bother now before retirement; imagine what it feels like when the paychecks stop rolling in. We talked about debt and how to get that paid off back in lesson 2A, go back and create a plan if you need to.
Assumption #4: Business expenses will change.
This one kind of goes along with #2 – the assumption is you have clothing needs for your job, lunches out, tolls, parking. All the things that go along with going to an office. If you don’t have these today. These expenses won’t reduce in the future.
All of these assumptions are supposed to add up to 30% of your income. I know when I apply it to my life, it’s hogwash. Nothing changes, I still need 100% of what I’m spending now, not 70%. But that doesn’t mean I can’t still prepare.
It’s time to look at what we spend our money on, not in terms of a budget, but in terms of what do we really need.
Now, if you know me and not all of you do, you know I live in an RV for part of the year and on a boat for the other part. I’ve already assumed “retirement” in terms of my expenses.
- I’ve eliminated a mortgage – or at least the one I still have is tied to rental income, so it is covered by income coming in for that purpose.
- I’ve got no “commute” now; although I do travel extensively, it is all business-related, and as an owner, it will be eliminated when I sell the businesses.
- I’m working on my debt elimination.
- I’ve got no lunch/clothing allowances that will change. I’ve still got to eat, and I’m wearing my activewear/yoga pants for the rest of my life.
Because we don’t live in a traditional home, I don’t have traditional expenses. There’s no cable TV, no landline, no internet service. I’ve got no power bill or heat bill, or trash service. I’ve replaced those with other things. My cell phone bill and fuel bill are higher than most. It’s a trade-off.
Now is the time to think about what you will need in retirement, and what you can do without.
Do you need all those annual subscriptions? Look closely at what you pay for monthly/annually and start to eliminate those you don’t need or aren’t using.
How are you paying for health insurance if you retire before age 65 and your Medicare eligibility?
Have you reviewed the Medicare options to see which parts you will be paying for?
If you have a hobby you intend to pursue after retirement, have you already acquired the tools?
Are there classes you’re going to want to take to pursue your hobbies?
What are your travel plans? Seeing friends and family or worldwide trip? Have you planned for that?
Recently I helped a family member review their expenses – even though they had been retired for a while, we looked at things they were paying for. We were able to find some savings. We eliminated the non-local paper subscription, adjusted the cable bill, added Netflix, and removed an extra cell phone.
If you are using something, keep it. Just be realistic about what you use and what you don’t, and then plan for their payments.
Eliminate your debt as best you can, add income streams. If you have a 2nd home you don’t use all the time, consider adding it to a vacation rental platform and earning a bit. I can help you get set up on Airbnb.
There are a few things to keep in mind as you prepare for retirement. One, your expenses will be more than you think they will. Two, your income will be less than you expect it to be. Third, keep your mind and body active now so you can continue to enjoy them in retirement. And finally, don’t be afraid of retirement – you will never have the money you think you need, because you will never know what that dollar amount actually is.
When I retired from my first career, I did it with the knowledge that I could probably find work in that field if I needed it. I think the same is true of most retirees.