Sometimes we often ignore or procrastinate an important decision until it’s too late, and the cost most times turns out to be quite prohibitive. Take the example of college education for you teenage kids, we all know that the fees for college are going through the roof, but you find that most people keep on postponing this cost until it’s too late. There are cases where you find kids are starting to attend college when the parents are planning or are about to retire. The last thing you want is to have major expenses when you are enjoying your retirement, because this can take a big chunk of your retirement funds. One way of ensuring that you do not have any expense is to pay off any major expense that you are anticipating will occur in your retirement, and as Liz Davidson explains in the following article, there are five major expense areas that should be paid off before you retire.
The future is uncertain. We cannot predict where we will be in five or ten years. When you think about it, you not only don’t know what path you’ll take but you don’t even know the paths that will be available to choose from. After earning my MBA, I worked as an investment banker prior to running a hedge fund. I never dreamed that one day I would start one of the first unbiased worksite financial education firms in the country. How could I have? The industry barely existed. So when you think about planning your own retirement, which for many will last anywhere from twenty to forty years, the challenge is to create some certainty from an uncertain future.
That is what planning is all about. Creating future income streams from your pension plans, 401(k), IRAs, investments, and Social Security and also estimating and projecting your future expenses is the basis of retirement planning. Since the future is difficult to predict, it makes sense to pick the more significant expenses a retiree has to make and either take care of them now before retirement or earmark funds to pay for them in retirement. In other words, pay for them now while you are still working.
The last thing you want to do is retire and about five years in, need to replace your vehicle, your hot water heater and your roof all at the same time. The superstition is that bad things happen in threes, and I’ll bet if we interviewed a hundred retirees, 99 of them could list three things that broke down at once that needed to be replaced. In fact, last year I remember I had a major car repair, a dead refrigerator and a dryer that gave its last gasp all in the same month. It was an expensive month. You don’t want that to happen, especially on a larger scale in retirement.
The answer is to take care of your significant expenses and major purchases now while you are still working. For example, a gas-powered storage type water heater has a lifespan of about 10 – 15 years. If you are close to the end of that lifespan, consider replacing it now with an updated tankless water heater, which has a 20 year lifespan. Then you can enjoy warm water for many years and have peace of mind that you won’t have an unpleasant surprise when you turn on the faucet and the freezing cold water never turns to warm. You either have a new water heater or you’ve got funds set aside for the replacement.
Checklist of things to pay for now – before you retire:
Housing costs take up 30 -40% of the average American’s income. For many, it would be ideal to pay off your mortgage when you retire. Review your mortgage statement for that pay off date and consider making extra payments now so the mortgage is paid off when you retire or soon after. Use a mortgage pay-off calculator to determine how much more you’ll have to pay.
If you aren’t able to pay off your mortgage when you retire, make sure you have the lowest cost on your mortgage. Interest rates have fallen to levels not seen since World War II, so consider refinancing to the lowest possible rate (if you haven’t already). Be careful not to add additional years to your mortgage when you do that.
Major home repairs
Will you need a new roof or do you see some wear and tear on your deck? Sometimes when you live in a home, you get used to seeing things and don’t notice what needs to be repaired or replaced. Do an inventory of what repairs you will need in the next 20 years and make them now if possible, or set aside funds to make them on an appropriate schedule. In many cases, for the largest repairs, such as a kitchen remodel or a new deck, the cost of the repairs increases the value of your home enough to pay for itself or at least come close even in today’s real estate market.
Minor home repairs
Consider giving your home a makeover. Have you ever gone to an open house for a home that has been in the same family for 40 years? Generally, you’ll notice these homes are dated and the homeowner never made the changes that might normally be done, such as updating the appliances and getting new floor coverings. You may have more time to do these updates when you are retired, but plan on doing them now while you are working and have the income stream to pay for them. Walk through your home and look at it from the perspective of a home buyer. Ask yourself what you’d like to change if you bought the house, then plan on making those changes.
Is your vehicle on the list of those expected to make it past 200,000 miles? If you own a Lexus LX, Porsche Boxster, Toyota Tundra, Ford Fusion Hybrid or Flex, or Honda CR-V, then your answer is yes. Regardless, a vehicle is a major expense to plan for before retiring. There are a couple of considerations. A new car carries with it higher insurance, taxes, and license fees, so if you are considering buying a new car, while you are working might be the best time to do so. There are fewer repairs with a new car, and you can often purchase a service package at a discount when you buy your vehicle. This helps to front-load your major expenses and control at least some of your future service expenses by prepaying them now.
If you are like many people and want to stick with your existing vehicle to see how many miles you can put on it, you will save money in the short-term. Your insurance premiums are lower and so are your annual license fees. Simply set aside money in your replacement vehicle fund for the day when it finally gives up and dies alongside the road.
The revolving door
According to a graph prepared by economist Tom Lawler and published on the Web site CalculatedRisk, the number of adult children living with their parents has exploded. A study published in the journal Transitions to Adulthood titled “What’s Going on with Young People Today? The Long and Twisting Path to Adulthood” reports that parents are spending as much as 10% of their income to help support their young adult children. This is a reversal of the way things looked 100 years ago when young adults often supported their parents. This revolving door may not be something pre-retirees are anticipating.
If you had children later in life, you already realize that you may have college expenses around the same time you plan to retire, and hopefully you have already prepared for that. What you may not have anticipated was the need to temporarily support your adult children above and beyond their education. This is a bit more difficult to plan for, but it deserves some thought. If you have a child working in a challenging field such as the arts or an industry that may continue to be hard hit due to the economy, would funding a trade school or helping them complete an advanced degree help them get back on their feet? Ask yourself if your children are self-sufficient, and if not, consider when they will be and what steps they need to take to get there.
Who knows what the future will bring? We always hear the saying, “All you can count on is death and taxes.” That is not entirely true. I think we know that things will get more expensive and that things will break down. By taking care of the big things now it will make a difference tomorrow, either to free up income by paying off debt or by simply handling things now ahead of time before it is an emergency. Everyone’s situation is different and your major expenses are going to vary depending on your circumstances and what part of the country you live in. As you are planning for your retirement think about your top five – what are the five most significant expenses you think you may have in the next twenty years?