Why You March Need LESS in Retirement Than You Think

Daniel Penzing
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No Payroll Deductions and Contributions

You’ll need to pay quarterly estimated taxes in retirement, similar to the amount of estimated taxes you may have been paying each year for your 1040 income taxes.

As far as your 401(k), you may be able to choose a lump sum distribution at retirement age in lieu of the traditional monthly payments, and the decision is up to you.

No FICA Tax

Another vital component that most people forget is that they will no longer have expenses related to employment.

When they were working, they had to make sure they had proper equipment, that they weren’t missing or late to meetings, that they had a good and trustworthy secretary, etc.

All the travel, lunches, conferences, and other expenses that come with working mean that you have to plan for your retirement knowing that you no longer have those expenses.

Otherwise, you’ll wind up struggling unnecessarily.

Less Frequent Need to Spend Money Decompressing

Your Mortgage and Other Debts May Be Paid Off

After closing on your home, the first thing you should do is sit down and pay off your credit cards, car loan, and other loans … first. If your mortgage was a 30-year fixed rate loan, the payoff process should be simple. After you make a small down payment, you’ll have to concentrate on paying your monthly payments for years.

When you approach retirement, all of your debt (except your home) will probably be paid off. You’ll then have thousands of dollars available to save each month, which will help prepare you for the years you’ll be spending in retirement.

The only debt you may have after paying off your home will be a mortgage for your future home.

You’re Free to Move to Where the Cost of Living Is Less

Yes, living in a less expensive area may mean living on a smaller income, but that’s fine because you’ll be living on the income you need, not the income you want.

What if the income difference is significant?

That extra money can go into savings, where it can help fund your retirement lifestyle. You’ll need less support from social security and can have a lower monthly cost for Medicare.

Lower house prices have important implications for retirement savings.

In the aftermath of the financial crisis, house prices dropped significantly. In London, Liverpool, Manchester, Birmingham, Glasgow and Bristol, prices dropped by 50% or more from early 2007 to the middle of 2014. Even in countries such as Germany, France, and Japan that were less affected by the financial crisis, house prices still dropped by roughly 20% from their peak.

As house prices fall, this also takes a big toll on other related assets including pension pots and personal portfolios. The question then arises as to whether lower house prices in fact make it easier for future retirees to support themselves.

In some ways, they do. In particular, higher home equity makes it easier to survive until retirement. If you want to cash out your home and retire early, you can do so with a reasonably high cash flow. However, two problems emerge from this. The first is that you’ll run out of money within three to five years, and the second is that on the verge of retirement, selling your home can be difficult if you need the cash because prices may be low.