How to avoid going broke in retirement

Share
More
How to avoid going broke in retirement

After decades of working, it’s time to retire and enjoy your golden years. But newfound freedom doesn’t mean you should stop budgeting.

Retirees are typically on a fixed income, which doesn’t vary. Creating some sort of financial plan can keep retirees from spending too much of their nest egg too quickly.

How to develop a budget on a fixed income

Before creating a budget, figure out your fixed monthly income based on retirement savings, Social Security, pension payments and other sources of dependable income. Then calculate monthly expenses into a budgeting spreadsheet.

This simple template measures income against expenses. Download the spreadsheet here and personalize it to fit your lifestyle.

Here's how to use it:

  • Enter cash on hand and fixed monthly income.
  • Add essential expenses and estimate spending on unfixed but essential expenses.
  • Add spending levels for wants like shopping, travel expenses and other hobbies.
  • Track spending every month. If you constantly overspend in a certain category, tweak the budget or figure out a way to lower expenses.

Planning on traveling the world? Or picking up that expensive hobby you’ve been wanting to try? Consider any lifestyle changes in retirement and budget for them. You may have to cut back on other things to accommodate the new expense.

Expenses tend to go up right after retirement, said John Scott, director of the retirement savings project at the Pew Charitable Trusts.

“But you have to be aware that you’re on a fixed income. You’re living off your nest egg,” he said. “It’s fine to enjoy some things, but just be aware we do live longer as a society and need to make those dollars stretch more.”

Unexpected costs to consider

While a fixed incomes doesn’t vary, inflation could impact its value. Retirement plans don’t always take into account the potential decline in purchasing power years into retirement, especially if there isn’t additional income.

Delaying Social Security for as long as possible protects against inflation risk. Social Security has a cost-of-living adjustment based on the consumer price index, said Scott. Delaying Social Security to age 70 protects some retirement savings from inflation because the size of your benefit increases.

Fees on retirement savings accounts can also hurt retirement income. These fees are often structured as a percentage of the money invested in an individual retirement account or 401(k) and are generally charged on an annual basis, depending on the account. Calculate how fees affect your savings using Pew Trust’s retirement fees calculator.

Health care costs in retirement

One of the largest expenses in retirement is health care. Insurance can cover part, but not all, of health costs. If you retire before 65, you must pay for health insurance. Premiums can be expensive, so shop around for a plan to find the best deal.

“Health care is a big deal. We do have health shocks in old age. It’s important to be ready for that,” said Scott.

Medicare

If you are over 65, you qualify for Medicare, a government health insurance program with four parts:

  • Part A helps cover inpatient care in hospitals, as well as home health care and hospice care. You won’t pay a monthly premium for Part A if you paid Medicare taxes while working.
  • Part B covers services from doctors and other health care providers. It also covers outpatient care, home health care and some preventive services. Most individuals pay a monthly premium for Part B.
  • Part C is a private alternative to Medicare Parts A and B. Medicare Part C comes with premiums, deductibles and other costs.
  • Part D covers prescription drugs.

Learn more about Medicare here.

Medicaid

Medicaid covers those with limited income. Each state has different eligibility requirements (we have a state-by-state guide here). You may qualify for both Medicare and Medicaid. Both cover doctor's visits, hospital stays and preventive care.

Long-term care insurance

This type of private insurance covers the costs associated with chronic ailments, such as nursing home and in-home nursing care costs (which Medicare and Medicaid typically don’t cover).

Long-term care insurance is expensive: A 60-year-old couple could expect to pay $3,381 a year for coverage, according to the American Association for Long-Term Care Insurance. But it could be a worthwhile financial investment as the population ages and care becomes more expensive. Nursing homes cost an average of $82,128 annually, according to SeniorLiving.org, a directory of senior living options. Learn more about long-term care insurance.

What to do if you haven’t saved enough

Feeling like you haven’t saved enough for retirement? You’re not alone. A recent survey of 300,000 people with 401(k) accounts found that 75% won’t be able to maintain their lifestyles when they retire.

Start saving as early as possible to avoid falling short, and try to avoid withdrawing money from any retirement accounts early. If you’re getting close to retirement and don’t have enough saved, consider working longer, or getting a part-time job.

“A lot of people don’t do budgeting,” said Scott. “They don’t think about what they need to live on, and realize they may have to go back to work.”

If you just want to have more flexibility in retirement with a fixed income, find ways to lower expenses to free up money to spend on interests you enjoy.

Need to start saving for retirement? Here are five ways to start saving in five minutes or less.

Want more money explainers in your inbox? Sign up for the Policygenius newsletter.

Image: Jon Ekert