What to Cut From Your Budget When You First Retire

Many of the things you used to spend money on were directly related to your job. Now that you’ve quit working, many of those expenses will disappear automatically. To make that happen, you need to identify the work-related costs you want to pay for yourself and transfer that money into something you enjoy.

You won’t have to go without anything; you’ll eliminate unnecessary costs that relate to a lifestyle you’re leaving behind. Below are the areas you should focus on first. They represent the easy wins:

Find the cost of getting ready for work

Think about a typical Tuesday in 2019. What did it take to get to your office? Gas or train fares, parking fees, a $12 lunch, since you probably forgot your lunch. Dry cleaning, work shoes, and coffee on your commute. None of these serve a purpose today.

There’s more to this than most people think. A $5 coffee and a $12 lunch, five days a week, adds up to over $400 a month. Add in driving to and from work and parking, easily another $500 to $700 a month, and it’s no wonder it felt impossible to find extra room in the budget.

Tell your auto insurer you’re driving far fewer miles

Part of the amount you pay for your auto insurance policy is calculated on how many miles you drive annually. Many drivers accumulate miles through commutes. Since you no longer commute to work, your vehicle may qualify for a lower rate, and some insurers provide a “low mileage” discount you must request.

Call your auto insurance company or agent to explain you’ve recently retired, resulting in reduced annual mileage, and inquire about having them re-rate your policy accordingly. If you have multiple vehicles, but only one is driven regularly and the others sit in the driveway most of the time, check with your carrier about potential savings by classifying the unused vehicles as ‘pleasure’ use. This is usually a 10-15 minute conversation with the representative that can result in saving hundreds of dollars per year.

Ask whether you still need life insurance

Life insurance provides replacement income for people who rely on it. If your children are adults living independently, your mortgage is paid off or near completion, and your spouse has sufficient assets and government benefits to meet their needs upon your passing, that life insurance coverage may not be serving a purpose.

Approach this area carefully, so avoid canceling policies hastily. A term-life insurance policy, which covers you for a specified period of time, generally expires after that term is complete and is usually straightforward to discontinue payment. Whole-life insurance policies (which build cash value) can be more difficult to terminate due to possible funds within the policy that can be accessed. Before discontinuing any type of life insurance coverage, evaluate who would experience financial hardship immediately upon your death. If the response is none, the premiums being paid could be allocated elsewhere. If uncertain, consult a fee-only planner who earns commissions neither from continuing nor terminating your current policies.

Cancel the subscriptions you forgot about

Most households are subscribing to various services such as streaming services, news apps, gyms that members haven’t been attending in months, software applications purchased during specific projects, and a monthly delivery of snack boxes. Beyond the cost, each one is one more thing to keep track of.

Review your previous two months’ bank and credit card statements. Circle each recurring charge listed. Be honest with yourself about which recurring charges earned their worth in May. You don’t necessarily have to cancel all of these services. For example, retaining both of your favorite streaming services while eliminating the other three may be a fair trade-off.

Clear high-interest debt before it eats your fixed income

High-interest rates charged on credit cards create the most costly item in virtually every household budget. Each month the outstanding principal grows faster than virtually any investment can grow in terms of returns.

If you have savings stored in a checking account earning minimal interest (e.g. 0.01% APY), clearing high-interest debt using some of these savings makes common sense. Focus on paying down the credit card with the highest interest rate while making minimum payments on the others. By clearing a $4,000 balance at 22%, you reduce your annual interest by about $880 – essentially providing real money back in your wallet each year afterward.

Ask whether your home still fits your life

Your housing expenses are likely the largest category in your budget. So, even modest changes here can dwarf many cancelled subscriptions.

The questions aren’t whether you enjoy living in your home. Instead, the questions are related to the costs associated with heating, cooling, maintaining, and cleaning rooms that you passed by for years.

You don’t need to sell to achieve savings here either. Some examples include questioning whether your property tax assessment is accurate, shop around for better homeowner’s insurance rates, refinance your loan, or explore converting one or more bedrooms into rental space. However, if your four-bedroom house has seemed overly large for years, retirement creates an ideal opportunity to consider downsizing to a smaller residence with lower operational costs. Making this determination will likely take time. However, give yourself permission to ask the question.

Treat eating out as a choice, not a habit

Eating out is one of the easiest ways to overspend without noticing, because each meal feels small. Two restaurant meals a week at about $60 a couple is about $480 a month, or close to $6,000 a year.

The objective here isn’t to prohibit dining out entirely; however, it’s to stop relying on it as an automatic activity. Cook at home whenever you normally eat out out of convenience or habit; reserve restaurants exclusively for meals you look forward to. Ultimately, you’ll appreciate the dining experiences you retain and realize considerable savings.

Send the freed-up money somewhere on purpose

Cutting is only half of it. The other half is deciding, on purpose, where the savings go so they don’t just evaporate.

Maybe it funds the travel you put off for 30 years, or an emergency fund that calms your nerves when the market drops, or more time with the grandkids and hobbies you never had room for. Once you can name what the savings are for, canceling things stops feeling like a loss and starts feeling like a trade you chose.

Photo by Kelly Sikkema on Unsplash