During retirement: take small financial steps (part 1 of 2)

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When you’re planning and saving for early retirement, your ER budget is only an estimate of your ER spending. It may be a very good estimate, and you’ll adjust it as you get closer to retirement, but only when you’re retired will you finally know what you’re really spending. It’s natural to keep a wary eye on finances during this huge life change, so you may find yourself hypervigilant of every expense and even worrying whether you missed something. Once you’ve retired, here are a few minor financial details to consider as you fine-tune your plan.

As long as you’re focused on your spending, review your budget and reassure yourself that you’re on track. A great starting point is examining all of your bills and services. For example retirees are eligible for discounts on home, vehicle, and liability insurance. Your home may be occupied more often, leading to fewer accidents or overlooked problems. Maybe you’re driving less or can shift to higher deductibles. If you’re not commuting every weekday then maybe you’re ready to drop the roadside-assistance membership. If you’re a homeowner, check your property-tax assessment to make sure that it’s in line with neighborhood values and that you’re getting your homeowner (and retiree!) exemptions. As you go about your weekly routine, ask the stores and businesses about their retiree or veteran’s discounts. You may even find discounts and double coupons for doing your business on a different day or at a different time– maybe the local thrift store has “Military Tuesday”. If you’re an early retiree then it may seem embarrassing or even silly to ask for a discount when you’re in your 40s, but stores will be happy to give you a break for shopping during their off-peak periods.

Do you still need to (or want to) continue all of your frugal habits, or even start new ones? Does your budget depend on you continuing to be frugal? Now that you have more time, will you become even more frugal? Or will you keep your habits at some convenient level simply because you dislike waste? Make sure your frugality still matches your values and doesn’t cross the line to deprivation. Sometimes it’s very hard to turn off old habits, even long after there’s no longer a need for them.  You’ll be retired for decades and you’ll have plenty of chances to adjust your spending and your lifestyle.

When you were working you may have avoided small expenses. Every impulse purchase cost you “life hours” of work that would delay your retirement date. Now that you’re in retirement, though, small expenses are just another part of the budget. If your finances have a good year then you can set aside more budget for small luxuries or charitable donations. In “not so good” years then these small expenses are the first spending cuts. The nice aspect of this consideration is that you now have a choice– the Girl Scout cookie sale is an indulgence, not a retirement-delaying event. You may even decide to focus only on the big financial issues and not worry about expenses that are only a few percent of your annual spending. Keep an eye on the big recurring life expenses like rent, mortgage payments, utilities, groceries, and dining out. Don’t worry about one-time spending decisions under $20– just track the total amount and stop when it reaches your budget limit.

When you were saving and investing for retirement it was much easier to cut your expenses than to raise your income. The same is true in retirement, but most of the retirement calculators assume that your retirement spending is constant and not variable. Few calculators can handle the spending flexibility, but you can!  The simplest calculators assume a constant spending over the remaining decades of your life, with perhaps annual inflation adjustments. Advanced calculators may handle economic “consumption smoothing” like the cost of a new roof, replacement vehicles, or a fantasy vacation. None of the calculators can model aggressive (yet temporary) spending cuts or decide how to shift expenses from one year to another.

So one of your biggest retirement advantages is your ability to tailor your spending to your situation. The roof has to be replaced someday soon, but you might be able to keep repairing it for another 6-12 months. You may not be able to do without a vehicle for long, but you certainly have the time to figure out alternate transportation for a few weeks while you’re shopping for bargains. If a bear market slashes your dividend income for 2-3 years then you still have the flexibility to allow spending to creep up temporarily, perhaps even as high as an annual rate of 5% or 6%, while you figure out how to cut expenses over the long term. And if your retirement timing is fortunate enough to enjoy several years of a bull market, then you could consider “taking some off the table” to raise your “emergency reserve” and “fantasy vacation” funds.

When you were working, you did some chores or activities a certain way at a convenient place because you had a limited amount of free time. Now that you’re not working, all of those chore and activity choices can be reviewed. A retiree’s time and labor are among their biggest resources and a great way to avoid “convenience” expenses. If you enjoy cooking then your grocery bill will drop as you buy fewer prepared foods and more raw ingredients. (Of course you may also spend more eating out!) If you’ve used a yard service or house cleaner then you can reconsider whether to continue it in retirement. It may seem a little silly to go to the gym for a workout when you’re paying people to burn at least as many calories cleaning your house, but maybe you can’t get the same workout at home and you hate housecleaning. If you enjoy gardening then you could start growing food and spices along with the landscaping.

You may be home more often, but your new daily routine could lower your utility bills. If the house used to be closed up all day while you were at work, you may be able to save during your retirement days by opening windows for natural heating and cooling. You could even ask your local utilities for a complete energy audit of your home. If the landscaping has always needed extra water or maintenance then consider changing to different plants. Decide whether to add better home insulation, compact fluorescent light bulbs, insulated windows, low-flow shower heads, EnergyStar appliances, and other money-saving improvements.  These changes all have an initial cost, but now you’re not moving every few years and you can enjoy the payback of lower monthly expenses. If your home-improvement skills are rudimentary then instead of tackling major projects you could just check for leaky toilets or make sure that the appliances are clean and working well. These tasks may have seemed impossible when you were working, but now your time and your labor are among your most plentiful resources.

You also have the time to become an even more diligent financial manager. You’ll already be making minor changes to your portfolio as you shift from accumulating to withdrawals. Now you can research other asset allocations or look for funds with lower expenses. If you’ve paid professionals to manage your investments or your taxes, meet with them to figure out what you can do better. Review your record-keeping and deductions and see what changes you could make. For example now that your income is lower, maybe it’s worth the tax savings to convert part of a conventional IRA to a Roth IRA. Most retirees have already chosen to educate themselves and manage their own investments without paying a financial adviser. As you become more proficient on your personal tax issues you may even decide that you can tackle your own tax returns.

Many military retirements involve a change of state residency from your active-duty domicile to your new place. While you’re re-registering your vehicles and getting a new driver’s license, check with your insurance company. They’ll learn about your new residency on their next database update anyway but they can also make sure you have the right coverage limits or tell you about more discounts. Now that you’re a card-carrying “local”, figure out what other discounts you may be eligible for with a local driver’s license or a utility bill with a local address. Your homeowner’s property taxes may change. Local parks and museums may have discounted (or even free!) admissions or local businesses may offer other bargains.

A few other financial issues may need your immediate attention. As you were retiring, your personnel and financial departments should have adjusted your tax withholding. Review that withholding to see if you need to pay more estimated taxes or if you’re giving the government too much of your money. If you sold back leave or received other lump sums as you left the service, you may have to pay estimated taxes now to avoid paying a penalty (plus interest) when you file your tax returns. If you’ve moved to a new state then your military pension may not be taxed, but you may still need to adjust your state withholding to make sure that you don’t have any unpleasant surprises at filing time. You may also need to consider county or other locality taxes.

Next post, we’ll consider how to handle your tax-deferred investments in the Thrift Savings Plan– and what other adjustments you may want to make to your investments.

Related articles:
How many years does it take to become financially independent?
Where to put your savings while you’re in the military
Simple ways to start saving
Frugal living is not deprivation
Start saving early
Tailor your investments to your military pay and your pension

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

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