Determining Needs vs Wants in Retirement

Before you retire, there are a few expenses you should consider paying off before you say goodbye to your wage or work income. We’ve seen that the retirees that can get rid of these expenses before retiring have more breathing room and feel more confident about their retirement plan. When you’re planning for retirement, you usually think about two types of expenses – those that are needed, and those that are wanted. 

The needs are the essentials, the absolute must haves to just live. 

The wants are the things that are nice to have, but you don’t necessarily need to survive.. 

However,  there are other types of expenses that really don’t fit into that category of needs or wants. These are the things that should be paid off before retirement. 

First, Pay Off High Interest Debt

The first expense to pay off is high interest debt. This is usually credit card debt, and sometimes it’s student loan debt. It’s fairly common for people to still have a large monthly payment towards credit card payments or student loan debt in their first year of retirement. 

This should be the number one thing you should pay off before saying goodbye to your job income or wage. If you retire with credit card debt and then get serious about paying it off in retirement, you’ll be taking a bigger amount from investments. This could dramatically alter your retirement plans. 

Recently, we helped a woman who had about $20k of credit card debt. She also had over a million dollars in her regular expenses. Adding on this $20k of a lump sum expense really had an impact on her retirement plan. When she realizied the impact it would have, it  gave her the motivation to work extra hard to get this debt payment down to zero before retiring. It gave her greater peace of mind and increased her confidence as she was going into retirement.

Plan for Travel Expenses

There are other expenses that you can either pay early or ‘earmark’ these in your retirement plan. Earmarking an expense means setting aside funds for specific purposes and either not including those funds in your retirement plan, or including them, but at least showing the specifics within the plan. 

The number one thing to earmark are big travel expenses. In the first few years of retirement, many people will plan a big trip that they’ve always wanted to take. These vacations may cost more than the typical vacation. 

Knowing that this is a bigger than normal expense (or a lump sum expense) thats coming early in retirement, you can either pay that ahead of time or at least earmark it in your plan.

Earmarking these large and irregular expenses in your retirement plan allows you to see the impact they have. Ultimately, planning ahead can give you peace of mind in making these larger purchases. 

Helping Adult Children

A few other large,l one-time expenses we’ve seen are related to your adult kids. These could be: 

  • Final college expenses 
  • Weddings 
  • Future gifts (like a home purchase or business venture)

For expenses like this, you don’t know when they’re going to happen, so you’re not able to pay them before you retire. Earmarking them is the next best step. Setting funds aside ensures thes potential expenses are ready and available if needed. 

One mistake that we’ve seen some retirees make getting close to retirement is not factoring in these one time expenses. They tend to get caught off guard when it’s time to pay for them, especially if the market is down.

Should You Pay Off Your Mortgage?

Paying off your mortgage before you retire is a big goal for many people. As you’ve heard before, behind every financial decision, there’s also an emotional one as well. And many people, they feel very strongly, or maybe adamant, on being debt free in retirement.

This works for many people. But for others, depending on their financial decisions, a mortgage could actually make sense in retirement. Some people see it as a fixed expense which doesn’t go up with inflation. It actually gets cheaper as everything else increases with inflation. As $1 can buy less and less over time, which is basically what inflation is.

This also may be really attractive depending on interest rates. Some people want to have a more flexibility in their retirement accounts by keeping some funds available in their non-retirement accounts. Rather than using that money to pay off the mortgage. 

There are two steps to determine if paying your house off makes sense to you.

  1. First, try to measuret the emotional feeling or comfort with debt. If you’re married, consider their comfort level as well. 
  2. Next,  map out both scenarios. What does it look like if you pay off debt early or don’t pay off the mortgage at all?

Lots of times it comes down to the strength of the emotional feeling around debt

Ask Your Financial Professional

When we’re thinking about paying off debt or earmarking expenses in retirement, get help from a financial professional. A CFP could be a great place to start. If you’d like to speak with an advisor at Streamline, feel free to contact us. 

Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.

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Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.