Downsizing Your Budget in Retirement

Many people nearing retirement already know they may need to downsize from those big family homes. Why pay for all the maintenance and upkeep when the kids are gone?

But they need to also think about downsizing their finances. Reducing that pre-retirement budget can be critical to a successful retirement.

Some people start reducing their costs by downsizing their homes, says Reid Abedeen at Safeguard Investments in Corona, Calif.

“At some point in their lives they say the house is too big,” says Abedeen. “They are considering the cost of a mortgage, if they have one, property taxes, insurance, utilities and maintenance costs on that home. They may want to consider downsizing to a smaller home where (the costs of) all of these things will be cut down.

 

“That comes with positives and negatives,” he says. “When people are considering a smaller home, if they move outside of where they have been living, the costs come down and the property taxes may come down. But they have to consider that they could be potentially moving away from kids, and what will that cost? Sometimes they are not considering those things when moving.”

 

Brett King, senior vice president at Elite Financial Services in Tampa, Fla., agrees. He recommends that you look at housing costs carefully if you plan to relocate.

“Even if you buy a smaller house, depending on location, it may cost you more,” he says. “There are more people retiring that are actually renting. I was surprised (at the number). They don’t want to be obligated any more to having one home, maintaining it with the property taxes and upkeep. It may be a way for them to save costs.”

Still, King says, the key to financially downsizing is to have a written plan.  “You want to have a written plan or a retirement road map and budget,” says King. “Do a complete budget. Go back 12 months to look at what your actual spending is. What are your goals and what can you cut back if you want to downsize? What part of that budget over the last 12 months are you willing to cut back on to make life easier when you downsize?

 

“Some things will naturally be less expensive in retirement,” he says. “The first thing that comes to mind is taxes. We don’t know what will happen in the in future: If you are 20 years away from retirement, you don’t know what taxes will be. But, if you are close, you probably will be paying less in income taxes. There are a couple of reasons. If you are 65 and older, if you don’t itemize you get a higher standard deduction.  And you don’t have to pay into Social Security and Medicaid.”

Abedeen says the retiree’s budget is the most important part of downsizing. “Financial independence is looking at your total budget and what it truly costs you to live month-by-month,” he says. “You are looking at income and your investments, how much you are extracting. I recommend people be proactive and realistically look at the taxes they had to pay every year. Insurance and utilities will continue to go up.

 

“They have to consider maintenance costs,” he says. “Things go wrong with our properties all they time. What is it going to cost? A budget is extremely important. That is the first step. They must be looking at budget.”

 

King says many financial professionals will tell you that the rule of thumb is living costs in retirement are only 75 to 80 percent of your pre-retirement costs.

“That and lower taxes can help you downsize what you need,” he says. “The other things you will likely be paying less for are clothing and dry cleaning. When you are not working any more you don’t have the same expense. You tend not to buy as much for your wardrobe. If you end up with your closet full, the options of donating to charity for write-offs will help you lower your taxes.”

Other things lowering your costs in retirement, says King:

  • There is less gas and maintenance on vehicle and lower car insurance. You are not driving to work. Plus you are older. You may not need that spare vehicle.
  • You won’t have co-worker gifts and fundraising activities, he says. All that fundraising going on with their kids, like girl scout cookies, that you feel obliged to buy. It’s a subtle way to lower costs.
  • No more contributions to you retirement accounts, like your 401(k) or IRAs. “That’s a big difference,” King says.

You are also able to take advantage of senior discounts, like a $10 lifetime pass to National Parks, he says. Some states also offer free hunting and fishing licenses for retirees.

All in all, some of the financial downsizing comes almost naturally. But if you don’t start with that budget, you may be headed for trouble.

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