5 Ways to Save Money in Retirement

In retirement, it's time to spend wisely.
With retirement, you're dealing with a phase of your financial life where you have a limited amount of money and no concrete idea of how long it must last. With finite resources, you must be mindful of your spending so you won't outlive your money and so you'll have the funds for the things most important to you.
"By the time people are ready to retire, or have already retired, they should have a very current picture of what their spending is," says Tim Kober, a certified financial planner with Cedar Financial Advisors in Portland, Ore. "There's the problem of spending going up in the initial part of retirement when people do all the deferred things that they've been wanting to, and it's important that they don't overdraw their nest egg to make all those nice things happen."
Retirement has many stages, and not every stage is one where you'll want to splurge. But it's important to realize that you may spend more initially, and budget accordingly. As you get things like the travel bug out of your system, spending may go down. But other expenses, like health care, may increase.
Time to Face Realty
A potentially emotional decision about retirement expenses is a possible need to downsize your housing, says Kober. Although adult children may be emotionally attached to the old homestead, "you may need to have the brutal, honest conversation with your family and say, 'This isn't a long-run sustainable housing situation.' You can reduce your housing costs and spend more time and money on leisure activities."
Gordon J. Bernhardt, CPA, a financial planner with Bernhardt Wealth Management in McLean, Va., agrees. Many consumers bought too much house or spent too much money on rental properties during the real estate boom and now may face a cash flow problem in retirement. "Is the individual overextended? Did he or she buy too much real estate and is facing the consequences of negative cash flows? In the cases we have seen, that individual is still above water, but selling the property will help their cash flow."
But remember there are a number of costs involved in moving, including real estate commissions and potentially higher property taxes. Also, according to Bankrate's 2010 Closing Costs Survey, average closing costs on a $200,000 home were $3,741.
Do Expense Accounting
Experts say one golden rule of retirement should be "Plan what you spend, spend what you plan." "Too many people don't have a budget," says Michael Kay, a certified financial planner who's president of Financial Focus in Livingston, N.J. "You need to know which costs are fixed costs, and which costs are discretionary. It's the discretionary costs that you choose, that you can trim."
Before you can cut your discretionary spending, you have to know how much it is. So keep track on what you're ppending for frills like entertainment, travel or impulse purchases.
Dining out is one place to put your budget on a diet, says Bernhardt. "Our clients have shared that they did not realize how much money they spent on eating out until they changed their habits and ate at home more often," he says. "And they did not feel like they were making a significant sacrifice."
Be Present-Minded
Grandparents and parents, naturally, want to lend a financial hand to their descendants. But it's not a good idea if it imperils your ability to stay financially solvent in retirement. Take a hard look at any outright cash gifts that you are giving, or expenses like private school tuition or summer camps that you're covering.
"Some of our older clients have reduced their annual gifting to reduce the withdrawal rate from their portfolios," says Bernhardt. "It's nice to be able to help out the grandkids, but you don't want to risk running out of money."
Go to the Goals
Whether you're already retired, or about to be, you need to periodically re-evaluate your personal spending goals. "You start with your core beliefs, what's important to you, and then you take a look at your financial reality," says Kay. "Then you may have to say, 'OK, do I need to make changes in my discretionary spending or do I need to make structural changes, like in where I'm living?'
"Some people might say, 'It's really important for me to live near my grandchild, and I'm willing to give up some discretionary spending to do that,'" Kay says. Others might conclude that some cuts in structural expenses are worth it in order to send a grandchild to summer camp.
The bottom line, Kay says, is that you must have a game plan to achieve your goals.
Drive a Bargain
After housing, cars are one of a consumer's biggest expenses. "People don't think about operating costs and the total costs of owning a car, including repairs, insurance and maintenance," Kober says.
Kober notes that couples can save money by cutting back to one vehicle. Also, retirees might employ other creative strategies like renting a cheap car for long trips instead of putting more wear and tear on their own set of wheels.

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5 Mistakes You May Be Making in Your 401(k)

Some might believe that making contributions to a 401(k) plan during your working years will provide enough money for retirement. Somewhere over the rainbow, there's a pot of money waiting for you. Unfortunately, no one is going to hand over a lump sum that will cover all of your living expenses when you stop working. This is just one of the common mistakes that people make when it comes to their 401(k) plans. Here are some of those blunders, and how to improve your chances of reaching your retirement goals:
1. You don't make any changes in your 401(k). Many workers sign up for a 401(k) plan when they start a job, and then don't pay any attention to their investment selections afterward. Studies have shown that just one in six 401(k) participants ever changes investments in their plan. Your retirement plan is not a "buy and forget" investment. Be proactive with your 401(k) by checking your investments every quarter, and making sure the funds you own are still meeting your expectations and are still the best of those available. It's a lot like getting your car serviced -- every few months, your car needs an oil change, and maybe a tune up.
2. You make too many changes in your plan. Some investors respond to day-to-day headlines and fluctuations in the market and feel like they have to move with them. Making too many changes based on emotions can cause you to take short-term actions that end up causing you to sell low and buy high, the exact opposite of the best strategy for opportunities to get higher returns. Say you're seeing the Dow Jones Industrial Average drop 100 points one day, and you sell your stock funds. The next day, the index gains 150 points, and the funds you sold are rallying, too. If you want to buy them back, you'll have to pay the higher price. Try to sit still and don't let your emotions rule -- otherwise your plan will get off track.
3. You don't have the right asset allocation. You won't have to make many changes to your 401(k) if you start with the right mix of different kinds of stocks, bonds, and cash. Some people get stuck when they have to choose mutual funds for their plan. Don't ask your parents, spouse, or friends about which funds you should pick. First, figure out your asset allocation and risk tolerance. Then examine the funds offered in your 401(k) plan and pick the ones that fit. Many mutual fund companies have general asset allocation recommendations (conservative, moderate, aggressive) to guide you, but your selections don't have to follow any set of rules. It may be worth the cost to hire a certified financial adviser to help you choose a diversified mix of funds that meet your specific needs. An adviser will also monitor those selections each quarter and help you make changes when needed. Depending on market conditions, you might have to re-balance your portfolio a few times a year to make sure your asset allocation stays intact, or adjust your asset allocation if your needs change.
4. You're chasing performance. Many investors crowd around funds that performed the best last year. They buy the fund at the peak price, only to be disappointed that the fund can't keep going up. Don't fall for the best performers of the moment. What you really want to know is which funds are going to do well next year. Given that no one knows for sure which areas of the market are going to be winners, it's best to be diversified among many different kinds of stocks and bonds and stick with your asset allocation. That way, you should be able to earn more when the market goes up and lose less when the market goes down. This is because a diversified portfolio is designed to avoid having all eggs in one basket, so while it can prevent losing more than the market during a market decline, it cannot produce more than the market during an upsurge.
5. You're not saving enough. Many companies will match employees' 401(k) contributions up to 3 percent of their salary, so that's all many people contribute. That may not be enough. Contribute 6 percent or 7 percent of your salary, or even more if you can. If you get a raise, put half of it into your 401(k). Use a retirement calculator, such as the one at Mutualfundstore.com, to help determine how much money you'll have at retirement. Many advisers used to estimate that people would need 60 percent to 70 percent of their income to retire comfortably. However, that might not be enough given that many people plan to be more active and travel in their golden years. Plus, people are living longer, and could face higher medical expenses. That's why you need to start saving and contributing as much money as possible to a 401(k) when you're young, and continue the discipline throughout your working years.