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5 Ways to Prepare Your Finances for Retirement

Jeff Rose

The basic foundation of retirement planning is building up a retirement savings portfolio that is large enough to enable you to enjoy a comfortable lifestyle for the rest of your life. Faithfully funding and intelligently investing in a 401(k) plan, individual retirement account or similar type of retirement savings vehicle is an essential component of your retirement plan.

However, as important as it is to save, it's just the start. There are other strategies you should be working on that will help you get ready for retirement and build your retirement portfolio. Consider these changes that will improve your retirement prospects:

Start cutting your living expenses down to size. This strategy is important on two fronts. First, by cutting your living expenses now, you will be able to save more money for retirement. And second, you will be conditioning yourself to live on less money so funding life in retirement will get easier.

Gradually cut back on unnecessary expenses and eliminate services that you hardly use. For example, you could find less expensive ways to buy groceries, review your insurance policies to see where you can cut your premiums and improve the energy efficiency of your home to lower your utility costs.

Perhaps most importantly, find less expensive ways to entertain yourself. Entertainment is an easily changeable expense. Since you're having fun while you're doing it, money can disappear quickly and easily. Reducing entertainment costs will continue to pay off in retirement. Since you'll have more leisure time, you'll need to find more ways to entertain yourself on the cheap.

Get off the debt merry-go-round for good. This may be the single most effective way to cut your living expenses. If you're currently making monthly payments on credit cards, student loans or car loans, you can reduce your living expenses by hundreds of dollars per month just by paying off debts. The more that you can pay off, the less income you will need in retirement.

Living a debt-free life continues to be a good strategy when you reach retirement. One of the critical disciplines necessary in retirement is staying out of debt. If you can adopt that habit now, there will be less of an adjustment when you retire.

Cut your house payment in half or less. Your monthly house payment is likely to be your single biggest expense. As you are looking to reduce your cost of living in preparation for retirement, there is no way you will be able to do that effectively without substantially reducing your largest expense.

If you plan to stay in your current home, make certain that your mortgage is paid off by the time you retire. Alternately, consider relocating to an area that has lower priced housing. If you have 50 percent equity in your current home by the time you retire and you can move to an area where houses cost half as much, you should be able to purchase one without borrowing for a mortgage.

Be ready for health care sticker shock. Don't assume that your health care costs will be roughly the same in retirement as they are during your working years. There's a very good chance that they'll be higher, and maybe much higher. There are several considerations regarding health care in retirement:

-- If you currently have health insurance through your employer, you're probably paying only a fraction of the monthly premium. Once you retire, the employer subsidy will be gone.

-- If you retire before you turn 65, when you will be eligible for Medicare, you will have to obtain coverage through your state's health insurance exchange. That coverage could be expensive when you're in your late 50s or early 60s.

-- When you do finally qualify for Medicare, you'll have to pay a premium to participate. The Medicare monthly premium will be $121.80 for new beneficiaries in 2016, and those who earn more than $85,000 per year pay even higher premiums.

-- If you are on Medicare, you will almost certainly need to obtain a Medicare supplemental policy, which is often referred to as Medigap coverage. The premium for that coverage can add several hundred dollars per month to your Medicare premium.

Do some careful investigating of your health insurance options, and get a reasonable approximation of what your monthly costs will be once you retire. This is not an area where you should allow yourself to be taken by surprise.

Emergencies won't stop when you retire. Be prepared. While you're building your retirement savings plan, you will also need to prepare for emergencies. It's possible that you will need a larger emergency fund in retirement than you do while working. In large part this is because health care costs will be a major variable, and you have to be ready for uncovered expenses.

You should also be ready to make major repairs on your home and car. You may need to help your adult children who are going through a difficult time. Make a reasonable estimate of how large your emergency fund should be to cover these essential costs, and factor funding it into your regular retirement budget. For example, you could make monthly payments into a fund to cover the replacement of your car. This will enable you to purchase a car without going into debt when the time comes.

Implementing these strategies will enable you to save more money for retirement. You will also be better prepared for the new life that retirement will bring.

Jeff Rose is a certified financial planner, U.S. combat veteran and the founder of GoodFinancialCents.com.



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