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If you don’t take the withdrawal, you'll have to pay an excise tax penalty of 50 percent of the amount you should have withdrawn, plus regular income tax on that amount.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.
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.
5. Spend taxable accounts first. It’s generally better to spend money that you have now and pay taxes on that first. The idea is to continue to defer taxes on your retirement accounts for as long as possible. “It clearly makes sense to take advantage of low capital gains tax rates and low taxes on dividends,” says Adam Bold, founder and chief investment officer of The Mutual Fund Store and author of The Bold Truth About Investing: Ten Commandments for Building Personal Wealth. "It is likely that there will be higher tax rates in future years."
6. Avoid investment fees. Administrative, investment, and transaction fees erode your nest egg over time. For example, paying an annual fee of just half a percent of your account balance can reduce the purchasing power of your savings at retirement by one-eighth over a 30-year career, according to the Center for Retirement Research at Boston College. And even after you stop contributing to your retirement accounts, many of the fees continue. “Go to the Web site and look up the expense ratio on the funds you have available. You can sometimes cut your expenses by 75 percent or more,” says David Loeper, president and CEO of Wealthcare Capital Management and author of Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money. Consider lower-cost mutual funds. “You can have a globally diversified portfolio covering all risk parameters for less than 75 basis points. That should be the absolute maximum," he says.
7. Find more affordable housing. Slashing your housing costs can give your nest egg a quick boost. Raymond Branz, 77, sold his 2,200 square-foot home on Florida's Marco Island and moved to a condo in Naples shortly before he retired from the real estate business in 2000. “We sold our home for twice what we bought the condo for,” he says. In many cases, there's little reason to hold onto a large house once the children move out. Also, consider moving to a low-cost locale in the States or even abroad where the cost of living and taxes are lower.
An increasing number of retirees are living with their adult children, which can cut costs for both generations. You can provide affordable (or no-cost) childcare for your grandchildren, and you'll also have more people to assist with eldercare should you need it. Fanchone Myers, 66, a Spanish teacher in Malakoff, Texas, moved into a separate building on her adult son’s property about a year ago and now spends much of her free time with her three-year-old grandson. “We go fishing at a pond and that doesn’t cost much,” she says. “He can cast really well and reel them in too. That’s my entertainment.”
8. Cut transportation costs. Branz and his wife downsized from two cars to one since they no longer to commute to work. “Since I retired, my schedule is the same of my wife’s,” says Brantz. Sometimes retirees even go car-less. Some cities have free or low-cost transportation options for seniors, such as the AppalCart Transportation Authority in Watauga County, N.C., which transports residents age 60 and older to senior centers, doctor’s offices, and grocery stores free of change. Car-sharing services like Zipcar are another option.
9. Prioritize spending. When Dennis Mogel, 61, was laid off by an oil company 13 months ago, he began buying groceries in bulk from Sam’s Club. He also cut back on trips, and plans to forgo his season tickets to the theater in Philadelphia next year. “Over the winter, we had a lot of soups my wife made as a way of cutting down,” says Mogel, who now works part-time from home as an Internet marketer in Levittown, Pa. Like him, a whopping 71 percent of Americans age 50 and older have cut back on spending in the past year, according to a recent AARP survey. Coupons, early-bird specials, and senior discounts are sure to be part of any frugal retirement plans.
10. Comparison shop senior discounts. Getting discounted passes to movies and museums and 10 percent off merchandise at your favorite store is one of the great perks of getting older. But just because something is called a senior discount doesn’t mean it’s the best deal. A recent southwest.com search for a one-way senior fare from Washington, D.C., to Los Angeles yielded a $204 ticket. Meanwhile, the cheapest seat on the same flight (listed next to the senior fare) was $119. And a query for a hotel room in downtown Chicago found that the best available senior rate was $165, while the best available overall rate for the same night was $152.95.