How to Manage Money to Prepare For Retirement
You’ll probably have a bit of time between deciding to retire and actually taking the plunge. For me and my partner Paul, that period was relatively short, about seven months. I’d worked out that we’d have enough to live on when we left work if we tightened our belts a wee bit. Some of you are going to take a bit longer to figure out that financial survival plan and put it into action.
Quantifying Your Future Budget
First of all you’re going to have to work out what you need to live on. This will vary according to the country that you live in. If you live in the United Kingdom the website of the PLSA is a good starting point for your research. It gives the idea of the expenditure needed for singletons or couples to live with basic, moderate or comfortable standards of living.
Just be aware that these standards assume that you live rent or mortgage free. We were lucky enough to be in this position. I’d also like to point out that these figures are not set in stone. Our own expenditure falls firmly in the basic bracket yet we run two vehicles, go abroad for two months each year and make more than the £50 stipulated in charitable donations. We save so much on the basics because of entrenched thrifty habits. Let this be a sign of hope that you can live on far less than the experts predict.
Can You Increase Your Earnings?
In the interim time between making the decision to retire and giving up work you’ll have a steady income from your regular pay check. This is likely to be higher than your future income. With an end to your conventional working life in sight it’s worth considering whether you could up the ante and boost your earnings in the interim. Is there anyway that you could make some extra money to help you fulfil your dream?
Maybe there’s overtime to be had where you currently work or perhaps you could pick up some consultancy work or a few hours with another employer. Could you use a spare room to house a lodger or rent your parking space?
Alternatively now might be the perfect time to start that side hustle. After all, if your retirement plans work out you’ll soon have more time to devote to it.
Reducing Debt
As a priority use this time wisely to tackle any debts that you might have, including your mortgage. A mortgage is often seen as a different breed of borrowing when compared to other forms of credit. But, for the purpose of this exercise all debt needs to be seen as an unwelcome expense. Throw money at paying off. Here’s a useful link from My Community Finance which gives ideas on how to go about this.
Downsizing
Selling your existing home can free up a ton of money that you could use to generate an income and retire early. You could even do this without having to compromise on floor space if you downsize to an area where it’s cheaper to live. However if you downsize to a smaller property it’s likely that your future outgoings are going to be reduced.
Remember that you need to factor in mortgage redemption costs, professional fees and stamp duty, moving and home improvement costs. Be aware too hat it’s sensible to future proof your move. Think about transport links, access to community resources, proximity to family and friends and whether your new home will serve you well as your needs change with age.
Spending Wisely
My most important advice is to squirrel away as much as you can during this phase of your working life. However this comes with a caveat. Evaluate your possessions and identity any essential purchases that fall outside typical everyday expenses. Consider making these acquisitions while you still have a higher income.
In the months leading up to my own retirement I took this advice to heart. My bed needed a new mattress. The lumpy bumpy one that I had was not contributing towards getting a good night’s sleep. So I bought a top-notch pocket sprung one during the New Year’s sales. My sleep quality improved overnight after it arrived.
Worn out shoes were replaced. While I’m not Imelda Marcos I prefer to buy quality footwear for the simple fact that it lasts longer. I replaced my trusty black boots and old Birkenstock sandals. I also treated myself to a couple of pairs of neutral smart shoes. And my wardrobe had a few updates too. I bought myself to a new hardwearing waterproof coat to replace the one deemed ‘grandma-esque’ by my partner.
Preparing to Live With Less
In the run up to retirement I saved much more than usual. I was acutely aware that I would have to adjust to living on a smaller income. I focused on building up a nest egg to provide a bigger financial cushion. As I’ve already said I only had a few months between my decision to retire and my last working day. Even so, I managed to put aside my spending money for a year.
If you aren’t accustomed to being careful with money treat this as a learning period? How much do you really need to live on? Where can you make cuts without feeling totally deprived? These decisions are individual to you, based on your income and personal preferences. One person’s luxury is another’s necessity.
Luckily I was well practised at being thrifty before I retired. As a single mother living off one salary I made savings every time I considered buying something. This became integral to my psyche and applied to regular spending as well as one-off purchases. I virtually lived in that yellow sticker aisle!
One of my biggest expenses was travel. I wanted my son to experience other cultures and see a bit of the world. And he did. But I looked at the trips from every angle and shaved costs at every turn. Perhaps one of my proudest financial achievements was arranging a ski trip during the notoriously expensive February half term break on an unbelievably low budget.
The important thing is to treat saving money as a fun game and not a chore. You can be so creative with this that it doesn’t have to be a chore. Maintaining an attitude of gratitude, rather than dwelling on a sense of lack, is crucial.
Disclaimer
This post contains links to companies and organisations just because I’m happy with the products or services that they supply or I’m spreading the word about what they do. There may also be affiliate links to Amazon for books and other items that I am personally recommending. If you decide to make a purchase from them, I might get a little bit of commission at no cost to you.