The list of things that I should have done to prepare for a comfortable retirement is long, but today I'm writing about the few things that I did do right, not because of good planning but mostly by luck.
1. Pay off your mortgage: When I retired we had no mortgage. I had read once somewhere about the cost of mortgages and how much you can save if they are paid off early. The last time we moved we got a 15 year mortgage rather than a 30. Occasionally, when we could afford it, we paid an additional sum on the principal. Once our children graduated from college we had more disposable income and we accelerated our payments. Once our mortgage was gone, we didn’t increase our spending, but rather increased the amount we saved each month. (Well, we did spend a little more on upgraded vacations!) Owning our home allows us to maintain our lifestyle at a lower total monthly cost.
2. Pay off outstanding debts: We are debt free. If we use a credit card, we pay off the balance every month. Our cars, our boat, our toys are all paid for. When we bought our RV a few months ago, we paid cash. Even with low interest rates, there is a cost to using credit. I prefer to use that money to enhance my lifestyle rather than provide profits for a credit card company. Because we are debt free, it is easy for us to manage our monthly bills. Our monthly living costs are pretty low.
3. Live below your income: We have always lived within our income. When we were first married and had entry level jobs, we lived paycheck to paycheck…but we did not rack up credit card debt. Our credit cards were really a safety net, used only in an emergency when we didn’t have money to pay for an unforeseen event. If we had to use them, we made paying off the balance a priority in our budget. We have never lived large. Once we started earning more than subsistence level salaries, we started saving. We spend less each month than we take in. We don’t buy anything until we have the money to pay for it or until our monthly income is large enough to absorb payments.
4. Try living on your retirement income before you take the plunge: My husband has not yet retired. He would like to retire in the near future. He does not have as generous a pension plan as I do, so we know his retirement will reduce our total income. Since I retired we have lived on his income only and banked my pension checks each month. This has provided us with some insights into living on a reduced income, and safely allowed us to explore if total retirement at a reduced income is comfortable for us. It has also been a good transition period for me. We have not dramatically changed our lifestyle, but I am not as free-wheeling at spending as I used to be when I worked. I know that it takes much longer to rebuild our checking account balance at our reduced monthly income level. If my husband were to retire now, we know we would have to change our spending habits to live below our income. It’s a balancing act and we’re trying to find the perfect tipping point for us.
5. Have a back-up plan for increasing income: A part-time job is a good financial safety net for retirees. I am fortunate to have a teaching license that allows me to substitute in our local schools. Because substitutes are in high demand in our area, I can work as much or as little as I like. I use the money I earn substituting to pay for vacations and flights to see my grandchildren. I substitute one or two days a week. If I don’t feel like working, I don’t have to accept a job. For me, a recluse by nature, it forces me get out of the house and interact with people…and I’ve taken quite a few vacations on the money I earned without diminishing my account balance.
6. Start saving early: When my children were toddlers I purchased US savings bonds every month by having the cost deducted automatically from our checking account. After a few months, we didn’t miss the money. Every month those bonds came in the mail, one for each of my two children and one for my husband and me, until the bank ended the program. The children used their bonds to help pay college costs and we still have our stack of bonds to use in retirement. Both my husband and I took advantage of retirement saving programs offered by our employers. It is surprising how that money has grown over the years. I do regret that we didn’t save more aggressively, but I am thankful that we took the small steps that we did.
7. Have a plan for medical insurance: I could retire early because my employer pays the majority of the cost of my and my spouse’s medical insurance until I am eligible for medicare. Cost of private insurance with my pre-existing conditions would be prohibitive. When I started working for my former employer, I didn’t pay a lot of attention to the early retirement options in my contract because retirement seemed a long way off. I was fortunate to be able to take advantage of this benefit. As you approach eligibility for retirement it is smart to review your employment contract so you know if keeping your employer's medical plan is an option.
8. Get familiar with your employer’s retirement qualifications and benefits: Many retirement benefits are being renegotiated in light of the current financial crisis. It is important to keep on top of changes. I retired before changes in actuarial tables would have reduced my benefits. A good friend of mine retired this year from the Oregon education system because a change in her negotiated contract would end her entitlement to seven years of district paid medical insurance. She decided to retire before the new provisions took effect and that allowed her to keep a benefit that is worth well over $100,000.00 to her over the next seven years.
9. Walk away: Emotionally it was difficult for me to let go of my work life, perhaps because I made the decision to retire only a month before my final day of work. I didn’t try to hang on to elements of my former life. No lunches with former coworkers and/or dropping by to say hello. After Christmas when everyone went back to work, I went to Hawaii. I wasn’t available for questions because I wasn’t at home. It helped me to make a clean break.
My next post I’ll tell you about the things that I should have done before retiring.