By the time you reach your 60s, retirement is within sight. You may have a better idea of where you want to live when you stop working full-time, and what kind of lifestyle you will enjoy.
On the other hand, your finances may not be in as good shape as you’d prefer, given the retirement you envision for yourself.
Making a few tweaks now can help you get closer to the retirement you want.
Downsize your home and life
With the average new home now sporting a massive 2,400-square-feet of space, many empty nesters find themselves not needing – or being able to afford – such a lavish spread.
Downsizing means you can pull out some home equity – money you can then use to boost your nest egg. Going smaller can also help lower monthly expenses and improve cash flow. After all, smaller spaces tend to have less upkeep, repairs, and cooling and heating costs.
Bear in mind, though, that not all downsizing results in savings. Moving from a sprawling suburban ranch into a tony urban condo could end up costing more.
Pay attention to the other expenses of relocating. Some states don’t have an income tax and may have favorable tax rates for Social Security and pensions, which can help you stretch your retirement dollars. On the other hand, these same states might have high property taxes. Other states may have low income taxes, only to impose big sales taxes.
For example, Texas doesn’t have a state income tax, reports the Tax Foundation, but it has high state sales taxes. Be sure to do all your research before you relocate.
Figure out your income needs
During your working years, you may have been lucky enough to earn a steady salary. But in retirement, income becomes perhaps your biggest challenge. The first thing to do is figure out how much money you need each month, and where it will come from.
Retirement experts advise an income of 70% to 80% of your pre-retirement spending. Some costs, such as commuting or a work wardrobe, disappear, so you might spend less money in retirement.
Start by considering any guaranteed sources, such as Social Security and pensions. Next, turn to retirement assets. The ideal withdrawal rate – how much you can safely take out each year – has been hotly debated for decades. And while a financial advisor can give you personalized advice to help you figure the right rate for you, 2% to 3% a year is a rough estimate. In other words, if you have $500,000 in retirement savings, you can withdraw $10,000 to $15,000 a year.
If there is a gap between your income and your expenses, you might need to make some compromises. Can you reduce your outlays by downsizing your home, moving to a less expensive part of the country (or even to another country), selling an automobile and eating out less often? Or perhaps you can work a few more years than you had originally planned on, in order to shore up your savings?
Work longer and reap the financial rewards
Increasingly, working longer is becoming more commonplace. Eighteen percent of workers age 65 and older report being employed. In 2000, just 12.8% were.
Longer life spans, fewer retirement guarantees and the most recent recession have led many to worry that they would not be able to finance such a long retirement.
Working longer has many important benefits. First, it gives time for a nest egg to grow. For example, working two years longer can grow a nest egg by an additional 14.5%, assuming a 7% annual growth rate (this, of course, can never be guaranteed, and the older you are, the less stock risk you may want to take with your portfolio). Working four years more could potentially increase the value of a nest egg by 31%.
In addition, working longer also reduces the number of years your savings must fund. A $500,000 portfolio has a much better chance of lasting for 20 years than 25. And it can help you delay the start date of your Social Security benefit, resulting in higher monthly payments for the rest of your life.
Don’t forget healthcare
Though healthcare factors prominently in retirees’ budgets, many people fail to plan for this big-ticket item. According to HealthView Services, a healthy 65-year old couple retiring this year can expect to pay almost $395,000 for medical care not covered by Medicare.
What’s more, healthcare costs increase by twice the rate of overall inflation. The Centers for Medicare and Medicaid estimate that health spending will grow almost 6% a year through 2024.
To tame those costs, make sure you have a robust Medigap policy to cover things Medicare doesn’t, such as copayments and coinsurance. In addition, mind your health by eating well and keeping your weight in the normal range. People who have chronic conditions such as diabetes and heart disease spend more than those who don’t.
Entering your 60s gives you much-needed clarity on the retirement front. Use these years to lay the foundation for the retirement you want, focusing on where to live, your income plan and your lifestyle.
Ilana Polyak is a freelance writer who specializes in personal finance and the financial advisory industry. Her work has appeared in The New York Times, Barron's, Kiplinger's Personal Finance, Bloomberg BusinessWeek and CNBC.com, where she is a frequent contributor.