In retirement your income is largely fixed. Your Social Security payments will increase only by the annual inflation rate. And you can safely withdraw only about 4 percent of your savings each year, perhaps also adjusted for inflation. Given these constraints, it can be difficult to cope with sudden or large expenses. One way to prepare yourself is to eliminate as many bills as you can before you retire. Your fixed income will provide for a better lifestyle if there are fewer bills you need to cover. Here are some retirement expenses you can pay for in advance.
Pay off your mortgage. Housing is the biggest cost most people face. If you can eliminate this expense by becoming mortgage-free before you retire, it will be much easier to live on your savings and Social Security checks. While you will still have to pay for insurance, taxes and maintenance costs for your home, these are likely to be much smaller than the cost of your mortgage payments. “When you have debt, that means that you have to have the cash flow to pay off the debt,” says Christine Falvello, a certified financial planner for Navigate Financial Advisors in Ocean View, Delaware. “If you don’t have mortgage debt, you have reduced the demands on your retirement income and your portfolio.”
Complete home repairs. Your home might need updates to help you age safely, including bars in the shower to prevent slipping or laundry faculties on the same floor you live on to minimize stair usage. Or perhaps you haven’t checked your roof, furnace or refrigerator recently and know that you might soon be due for some repairs or replacements. Making these large upgrades before you retire allows you to avoid dipping into your retirement savings to pay for them. And if the expenses turn out to be more than you budgeted for, it’s typically easier to hold on to your current job for a few more months than to find a new job that pays well after retirement. When you make repairs, “you are using income for that, and you have limited resources in retirement,” Falvello says. “Make sure the property where you are going to live is in good condition.”
A new or fixed car. If you are making payments on a lease or car loan, paying it off gives you another opportunity to eliminate a bill before you retire. If you’re driving an older car, consider taking care of any nagging problems or exchanging it for a more reliable vehicle while you still have a regular paycheck coming it. Some two-car couples are able to sell one of their vehicles in retirement, which can even add a little bit of money to your nest egg and cut costs for insurance and maintenance. “To go into retirement with a house that is in good shape and a car that is in good shape certainly helps,” says Matthew Kovalcik, a certified financial planner for Kovalcik & Geraghty Wealth Partners in Upper Arlington, Ohio.
Eliminate debt. If you have high-interest debt, it’s a worthy goal to keep working until you have eliminated it. Paying off credit cards, student loans and car loans before you retire makes it much easier to live well on a modest nest egg. “If you have loan debt for a car or obviously credit card debt, those are the first ones to attack,” says Dennis Houlihan, a certified financial planner in Fort Wayne, Indiana. “There’s no benefit to those types of debt, and to eliminate that just gives one piece of mind.”
Prepay taxes with a Roth account. Saving for retirement exclusively in traditional 401(k)s and IRAs can result in a big tax bill during your retirement years. Income tax is due on each withdrawal from traditional retirement accounts. But you have already paid the income tax on money you deposit in a Roth 401(k) or Roth IRA. So withdrawals after age 59 ½ from Roth accounts that are at least 5 years old are typically tax-free. If your income makes you ineligible to contribute to a Roth IRA, you might still be eligible for a Roth 401(k) through your job or can convert some of your traditional retirement account assets to a Roth. “You can start piecemeal, shifting a little bit at a time into a Roth through a rollover,” Houlihan says. “If you do it at the right amount, it could be taxed at a low rate, and that can make sense.”
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5 Ways You Can Pay for Retirement in Advance originally appeared on usnews.com
