David Lerner Associates: How to Reduce Your Living Expenses During Retirement

There are at least two main components to being comfortable financially during retirement. The first, of course, is saving up as much money in your retirement account as you can during your working years, so you have the biggest possible retirement nest egg.

The second might be equally important: Reducing your living expenses during retirement. Cutting down on your spending is one of the best ways to make your retirement savings last longer.

David Lerner Associates Executive Vice President Martin Walcoe offers five suggestions for ways to cut your retirement living expenses and stretch your retirement dollars further:

1. Create a budget — and stick to it. Perhaps you have always lived according to a household budget. If you haven’t, it’s probably important to do so, since you might be living on a relatively fixed income during retirement. “If you have, strive to maintain your budgeting discipline during your retirement years,” says Lerner. “With so much free time on your hands, it can be easy to slip into bad spending habits.”

2. Downsize your home. Once your children have moved on to college and/or started their own lives as adults, you probably don’t need the same size house you did while raising a family. Selling your house and moving into a smaller home can accomplish two important financial objectives:

First, it could reduce the amount of your monthly mortgage payment. And second, you can add the proceeds you earn from downsizing to your retirement account, thus boosting your nest egg even more.

3. Pay off your mortgage. An even better strategy might be to pay the remaining balance on your mortgage in full. Or, use the proceeds from the sale of your home to buy a less expensive house in cash. “Doing so can give you a tremendous amount of financial flexibility in retirement, since your mortgage payment is probably your biggest monthly expense,” says Lerner.

Some financial experts advise against paying off your mortgage if you have a low interest rate and can deduct your mortgage payments on your tax return. There is certainly some merit to this argument, and this strategy could make sense in certain situations. Weigh your potential return on the funds if you invested them against your effective mortgage cost (including a possible tax deduction) to decide the best strategy for you.

4. Sell one (or both) of your vehicles. If neither you nor your spouse is working, you might not need two vehicles any longer. Selling a vehicle could not only allow you to sock a nice chunk of change in your retirement account, but it will also save you money in car insurance, gas and regular vehicle maintenance.

Depending on where you live and what your public transportation options are, you might even be able to go completely carless. Car sharing might also be an option. With car sharing, you can rent a vehicle for a short period of time, including by the hour. This is becoming an increasingly popular transportation option in many urban areas.

5. Lower your taxes. According to Lerner, money withdrawn from non-Roth retirement accounts is usually subject to taxation at ordinary income tax rates. “One way to help lower your tax burden in retirement is to stretch out your retirement plan withdrawals,” he says. You don’t have to start taking required minimum distributions (or RMDs) from traditional IRAs and 401(k)s until you reach age 70½, so it could be possible to lower your overall tax bill in withdrawing smaller amounts of money over a longer period of years.

Also carefully plan how you will withdraw money from your retirement account so you don’t lose valuable tax breaks. There are a number of tax deductions and credits that phase out once annual income (which includes IRA and 401(k) withdrawals) exceeds a certain amount. “So if your scheduled retirement plan withdrawals and other sources of retirement income will put you over the limit for a tax break, consider adjusting your withdrawal strategy,” Lerner suggests.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC