Shifting Gears for Maximum Savings
Whether you’ve been building your retirement accounts for years or are just starting your nest egg from scratch, the 10-year point is a critical time for retirement success. Once you’ve done the retirement calculations described earlier and know how much you need to accumulate to reach your goals, it’s time to scour the budget for money that’s better spent on building your nest egg than on other expenses. Let’s face it; if you’re in your 50s, you’ve probably bought just about everything you need. If you haven’t, you should have a pretty keen idea of the difference between what you actually need to purchase and what you’d describe as a luxury or nice to have. These three simple questions will help you clarify that distinction.
• Will I still own this and be actively using it in five years?
• Is this potential purchase something I decided for myself that I should have, not because of an enticing ad or because I want to keep up with a friend’s lifestyle?
• Will this purchase help me reach my retirement goal?
If you’re as focused on building your nest egg as you need to be in the 10 years before retiring, you should be able to answer “yes” to each of the three questions. You may find that just taking the time to ask yourself these questions—to deliberate over your spending decisions—will delay your purchase enough that you’ll find you really don’t need to buy it. Not surprisingly, studies have shown that the more advertising a person is exposed to, the more he tends to buy, despite the fact that he might have no real or long-term need for the product or service.
Rainy Days
Americans feel a lot of cultural pressure to spend and appear affluent, especially when they’re in their 50s and older. Prove your financial success by retiring earlier or better than your peers instead of being the one who has the shiniest toys while he’s working but has to settle for a financially shaky retirement.
Often, the process of deliberate spending is sabotaged by a compulsion to “keep up with the Joneses”—a self-defeating determination to appear as affluent as one’s neighbors seem to be. This mindset, if you let it control your spending behavior, can put your 401(k) and IRA retirement accounts at serious risk. Thoughtless or misguided spending will leave you with less money to invest in your accounts. At the same time, you’ll be building habits and developing lifestyle expectations you won’t be able to maintain in retirement.
Finding Money in the Budget
M&M’s—monthly money meetings—are especially important at this age. If you’re searching through the budget looking for ways to increase your retirement savings, keeping a close tab on your expenses and maintaining clear communication with your spouse or partner is very important. Deciding to allocate more resources to retirement savings than you have in the past will require changes to your lifestyle. Whether you’re single or in a household relationship, these changes could add some tension to your life. Keeping the greater purpose for the lifestyle change in mind by reviewing your goals, income, expenses, and investment accounts in regular meetings will help reduce the stress and increase the odds of success.
M&M’s clearly make sense for couples in which one partner takes charge of managing the household money, but single people aren’t off the hook. Planning regular time alone, focused on analyzing one’s goals and money, will keep him on track, too.
Full Account
If money discussions, let alone organized monthly money meetings, haven’t been part of your family dynamic, you may find the transition can be difficult. It’s important to try, though, particularly as a way to help ease the emotional transition into retirement.
Money management while you’re working is, in many ways, less complex than after you retire. While you’re young, you have a thousand details of career and family to focus your attention on. It can feel a lot like plowing a field with your head down, simply pressing through the myriad of tasks. Going to work, building a career, raising your family, and getting through the day-to-day minutiae can easily fill your mind, giving you plenty to talk to your partner about.
Once you retire, many of the big life projects you’ve been absorbed in—career and family—are wrapped up. As you refocus your mind during retirement on the thing that’s replaced your job as the provider of financial security—your nest egg—you may be surprised to find how differently you feel about your money. Regular money meetings, and perhaps eventually making money talk a habit, will help smooth the transition.
As you review your budget in your M&M, here are six key areas to find hidden money in your budget in order to increase your retirement savings:
• Prioritize the little things. Little expenses add up. Fortunately, small changes in your lifestyle add up, too. Be creative in finding and plugging money leaks. Don’t go cold turkey; gradual changes are easier to stick with. Take your own coffee or lunch to work one day a week; get the car washed one less time a month; skip one manicure a month; hang a suit and wear it one more time before dry-cleaning it; rent a movie instead of going to the theater to see it. The ideas are endless. Decide now what kinds of small things you can change. Then set up an automatic direct transfer from your checking to your savings for the amount you’ll save and watch it grow.
• Invest regular cost-of-living raises and bonuses. Many jobs include regular cost-of-living (COLA) raises and some pay bonuses. Use the COLA boost to increase your contributions to your work retirement plan if you’re not maxing it out already. Otherwise, add the amount of your COLA to your traditional IRA or to your Roth IRA. Use the Roth IRA if you’re eligible, so you’ll be building your after-tax/tax-free money basket for retirement.
• Invest the care-giving partner’s added income. If one person stayed home full-time or part-time to raise the kids, you may have an investing opportunity as she creates or increases her income as the kids grow. Investing this new income, while continuing to live on the same paycheck you raised your kids on, is a great way for empty nesters to turbocharge their savings.
Rainy Days
Many people count on an inheritance to fund their retirement. However, recent trends, such as elders living longer, higher-than-expected expenses for retirees, and greater ease in tapping home equity to cover daily expenses, will reduce what many will inherit from family. Planning on any inheritance is risky.
• Downsize the home. Moving out of the large home you raised your kids in and into something smaller and less expensive is the perfect way to free up money in your budget for investing. If you’re not planning to retire in the home you’re living in now, a break from the real estate taxes and maintenance costs can be a welcome respite. And you don’t have to buy your new place; tax laws allow unmarried homeowners to realize $250,000 in capital gains when they sell their primary residence without having to reinvest in a new home. Married homeowners, or homeowners selling because of divorce, get double the benefit, $500,000. If you’re planning to move to another location after retirement, take the chance to rent now and learn more about your living preferences without having to recommit to the expense of owning, especially if you plan to be in the home only a few years.
• Continue installment loan payments to savings. Are you finished paying off the car or home equity loan? Repurpose installment loan payments by investing them after the loans are paid off. If you were living fine while you were making the payments, there’s no need to bring the extra income back into your budget. Invest it for retirement security.
• Put a stop to financially supporting adult children. One of the best things you can do for your children is to help them build their money self-esteem as early as possible. Take a close look at the money you give your kids. Once they’re grown, it’s time to stop the allowance and refocus those payments into your own retirement investing. It may be hard to say no to them now, especially if the amount you’ve given has been significant, but the best way to make both you and your kids more financially secure over the long term is to build your nest egg so you’re not dependent on them when you’re older. Stopping your adult children’s allowance and your habit of picking up the tab for their expenses will also show them you have faith they can make it on their own.
Balancing Against College Costs
College expenses are one of the harder kid’s expenses to balance against needing to save for your own retirement. A college education is an important part of financial success, and everyone wants what’s best for their children. Nowadays, many career paths require a Master’s degree or higher. This can put extra pressure on you and your kids to absorb education costs, so it’s important to work together to plan how you will manage these costs.
Most people want a college degree to get a job that pays a higher salary. If this is the case, then college is an investment. But assess the return on this investment just as you would any other. Don’t encourage your kids to spend more on school than they need to by offering to pay their tuition regardless of where they go. If you don’t have savings already accumulated—savings separate from your retirement—to pay their college expenses, student loans for their education expenses are a perfectly appropriate option.
Your kids have their whole career ahead of them to pay back their loans; your resources need to go toward retirement, and with 10 years to go, you might not have time to pay off college loans and still save. Remember, you can’t borrow money for retirement. If, once you retire, you find you have extra money, then perhaps you can help them with their loan payments, keeping in mind our advice in the previous section.
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