You can retire sooner and with less savings if you are willing to significantly cut your cost of living. There are a variety of ways for retirees to reduce their bills that will have a meaningful impact on their spending power. Consider these ways to cut your monthly costs in retirement:
Pay off your mortgage. Eliminating your mortgage is one of the best ways to make retirement more affordable because it removes a sizable monthly bill. While you'll still have to pay taxes and maintenance costs for your home, that's likely to be a fraction of your mortgage payments.
Downsize your home. Once your children are independent, it's likely that you will no longer need a several-bedroom house in a good school district with a large yard that can be expensive to maintain. Consider downsizing to a smaller home in a less-expensive neighborhood, and add the proceeds of the sale to your nest egg. "Freeing up equity in a previously owned home for use in retirement is essentially the end point for owning a home in the first place," says Andrew Carle, founding director of George Mason University's Senior Housing Administration.
Move to an area with a lower cost of living. Where you live plays a big role in how much you pay for food, taxes and a variety of other services. Moving to an area where the cost of living is significantly less could allow you to spend down your retirement savings more slowly.
Sell a vehicle or go carless. If you and your spouse commuted to separate places each day, it is likely that you each needed a car. In retirement, you might be able to get by with one car, thus eliminating the insurance, gas and maintenance costs of the second vehicle. In walkable communities with good public transportation, you may even be able to get by without a car in retirement. "Some neighborhoods are much more walkable than others," says Robert Bornstein, a psychology professor at Adelphi University and author of "How to Age in Place: Planning for a Happy, Independent, and Financially Secure Retirement." "In general, cities and small towns tend to be more walkable than suburban areas."
Reduce your tax bill. In retirement, income tax will be due on withdrawals from traditional 401(k) and individual retirement accounts, but you can space out your withdrawals to avoid a hefty tax bill in a single year. Prepaying income tax on some of your retirement savings using a Roth IRA or Roth 401(k) allows you to avoid a big tax bill in retirement. "Diversifying the accounts is a nice way to control some of that tax expense," says Rett Dean, a certified financial planner and principal at Riverchase Financial Planning in Flower Mound, Texas.
Reduce investment fees. Investing in high-cost funds reduces your return. Minimizing investment costs is especially important for retirees who are living off income from their portfolio. In this case, selecting the lowest-cost funds that meet your investment needs directly translates to more money in your pocket. "If you are paying somebody to manage your money, you need to be really aware of how much your expenses are," says Celia Brugge, a certified financial planner for Dogwood Financial Planning in Memphis, Tenn. "Even a few percent of expense can make an enormous difference over time."
Avoid retirement penalties. There are significant penalties if you withdraw money from your retirement account too soon or too late. There is also a reduction in benefits if you sign up for Social Security early, and a late enrollment penalty if you delay signing up for Medicare Parts B and D. Pay attention to important retirement deadlines to avoid paying more than you need to.
Minimize health care costs. Health care is likely to be one of the biggest and least predictable costs you will face in retirement. But there are some things you can do to control your health costs. Consider purchasing a supplemental policy to Medicare to fill in some of the gaps and cost-sharing requirements traditional Medicare doesn't cover. Also, shop for a new Medicare Part D plan every year to make sure you are getting coverage for your medications at the best possible price. "If you have Medicare Part D, it's a really good idea to shop for what's out there to see if you can get a better deal every year during open enrollment," Brugge says.
Travel at off-peak times. Retirees have the luxury of being able to travel whenever they want to. Traveling is often less expensive if you avoid major holidays and school breaks, and most tourist destinations will also be less crowded.
Get senior discounts. One of the major perks of growing older is getting discounts at movies, museums and restaurants. While some senior discounts are well publicized and open to everyone old enough to have an AARP card, others are available only to those who know to ask. A little research can add up to big savings if you're willing to admit your age.