Low-Cost Retirement
Your later years can be golden without being gold-plated. Most retirees are frugal by necessity-but no less happy
What's more, a small but growing number of seniors are opting to supplement their retirement income through so-called reverse mortgages. By taking out this type of loan, you can receive a certain amount of your home equity in a lump sum, a line of credit, or monthly annuity payments for life—while still living in your home. And you don't have to repay the loan so long as you live in that house.
The catch is, when you die or move, the proceeds of the home sale will be used to repay the mortgage. And you have to be at least 62 and own a single-family residence to qualify for a government-insured loan. Because this involves the eventual sale of your home, Setzfand says, this strategy shouldn't be taken lightly. And keep in mind that like an annuity, the terms of the reverse mortgage will improve the longer you wait to take one out.
Of course, the simplest solution for some retirees is to find ways to limit spending—without sacrificing your retirement experience (Six Sure Ways to Save).
Take Gary Hutson. After retiring in 2001 following two decades as a railroad union leader, the 65-year-old now spends his time in far less stressful circumstances. Hutson and his wife, Kathy, are both artists in Spokane, Wash., and they use their free time—and the serene backdrop of eastern Washington—to paint wildlife scenes, carve wooden and metal sculptures, and do bead work.
When the Hutsons aren't creating artwork, they find plenty of other low-cost activities. For example, "we love garage sale-ing," says Kathy. And they also take frequent trips to a cabin they inherited on Sacheen Lake, 45 miles away.
Lower expenses. The good news for cost-conscious retirees: "All the numbers show that you don't need the same amount of money in retirement as you needed before," says Alicia Munnell, head of the Center for Retirement Research at Boston College. Once you retire, you stop saving for retirement. Your taxes are often lower, since your income is likely to drop. "And you don't need to buy work clothes or take transportation to work," she says.
Workers making $40,000 to $90,000 a year need to replace about 75 percent to 80 percent of their preretirement income on average, according to a 2004 analysis by Georgia State University and the insurance giant Aon. So if you earned $40,000, you would need to generate only about $32,000 in annual income to live as comfortably in retirement as you did during your working career.
And for the current generation of retirees, Social Security still covers around a third to more than half that amount, depending on income. So if you earned $40,000, you may need to generate only about $11,600 a year on your own—or through a pension, if you have one—to maintain your standard of living in retirement.
OK, but what if you still fall short?
"The answer with the biggest payoff is employment," says Munnell. Not only does finding work boost your current income, but it also delays having to tap your personal resources. And the longer that you can keep money in tax-deferred accounts like 401(k)'s and IRAs, the better. Plus, by working a bit longer,says Rande Spiegelman, vice president for financial planning at the Schwab Center for Investment Research, you may be able to wait before drawing your Social Security benefits.
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