10 Ways to Lower Retirement Costs

For many Americans, the recession means putting dreams on hold: it's tougher to scrape together a house down payment, find a new job, pay off debt, and retire in this economic climate. Some baby boomers are even deferring their retirement indefinitely and may work considerably longer than they originally planned. Still, there are things you can do now that will help you avoid that fate, such as downsizing your retirement expenses. Here are 10 frugal ideas to get you started:

1. Delay retirement withdrawals this year. Seniors over age 70½ are not required to take distributions from their 401(k)'s, IRAs, and 403(b)'s this year. The Worker, Retiree, and Employer Recovery Act, signed by President Bush in Dec. 2008, temporarily suspends the penalty for failing to take a withdrawal for 2009. “For our clients who don’t need the money, in most cases, we have recommended that they stop taking money out of their IRA because it saves them [money on] current taxes,” says Frank Jaffe, a certified financial planner for Access Wealth Planning in Roseland, N.J. “At least for this one year, they are letting their accounts hopefully grow tax-deferred as opposed to shrink tax-deferred. “

2. Remember to take future distributions. After 2009, however, it's imperative that those over age 70½ take a required minimum distribution from their retirement accounts each year. The required amount is calculated by dividing the prior year’s December 31st account balance by your life expectancy as determined by the Internal Revenue Service. If you don’t take the withdrawal, you'll have to pay an excise tax penalty of 50 percent of the amount you should have withdrawn, plus regular income tax on that amount. So if you were required to withdraw $3,000, but didn’t, the IRS claims $1,875: $1,500 for failing to take the required withdrawal, and $375 for income tax on the amount (assuming you are in the 25 percent tax bracket).

3. Sign up for Medicare on time. At age 65, you finally become eligible for government health insurance. But if you don’t sign up right away, prices skyrocket. You have a seven-month window around your 65th birthday to fill out the paperwork, which extends from three months before age 65 to three months after. After that enrollment period ends, your premium will increase 10 percent for each 12-month period you could have enrolled in Medicare Part B but didn’t. If you’re still working after age 65, different rules apply. If you’re enrolled in a group health plan from your current employer (or your spouse’s current employer), you can enroll in Medicare while you're still working or you get an eight-month period to sign up once your health coverage or employment ends. It’s also worth shopping around for the best-priced Medicare Part D prescription drug plan for any medications you need.

[See Most Medicare Part D Enrollees Don’t Choose the Lowest Cost Drug Plan.]

4. Delay claiming Social Security. You can claim Social Security benefits beginning at age 62, but that doesn’t mean you should sign up right away. For many people, it pays to wait. Payouts are permanently reduced if you sign up before your full retirement age, which is age 66 for baby boomers born between 1943 and 1954. If you would have been eligible for $1,000 a month at age 66, you'll get just $750 monthly at age 62 (25 percent less). If you put off claiming up until age 70, you'll get even bigger payouts ($1,320 monthly in this case). Plus, a higher initial check amount will also boost the dollar value of your annual cost-of-living increase. One caveat: If you have a health problem or otherwise have reason to believe you won’t live a long life, then you should sign up as soon as possible.

[See 3 Unusual Strategies for Claiming Social Security Benefits.]