Saving enough for retirement is a challenge for almost all Americans. Even if you know how much you need to hit your goal, finding that extra cash in your monthly budget isn't always easy. But there's another way to close the gap between what you have and what you need -- taking steps to reduce your retirement expenses.
By planning ahead and slashing some of your living expenses, you can reduce the amount of money you'll need to live on in retirement and may be able to free up more of your cash today to put toward your senior years. Here are three things you can try.
1. Pay down high-interest debt
Paying off any high-interest debt you have should be an equal or greater priority than saving for retirement. This debt can quickly balloon and may cost you thousands or even tens of thousands of dollars overall. If you become unable to pay your bills, you'll rack up late-payment fees, and your financial security will be in even greater jeopardy. You don't want to use your precious retirement savings to pay off these debts, so do your best to take care of them before you get there.
Trim your budget to free up extra cash. Limit your discretionary purchases, including dining out, and cut back or cancel subscriptions you don't use. You could also try to boost your income by working overtime or starting a side hustle. Put your extra money toward your debt first, or split it between your debt and retirement savings. You could also try taking out a personal loan to cover your debt or transferring your balance to a credit card with a 0% introductory APR to temporarily halt its growth.
2. Pay off your home or consider downsizing
Housing is most people's largest expense both before and during retirement. Anything you can do to reduce this cost will go a long way toward lowering your retirement expenses.
If you plan to remain where you are, aim to pay off your home before retirement so you don't have a mortgage payment to worry about. This could slash your housing expenses by thousands of dollars per year. Don't pay off your home early at the expense of your retirement savings, but if you have extra cash left over after you've made your monthly retirement contribution, consider putting it toward your mortgage.
Another option is to downsize your home. But if you're considering this route, make sure it will actually save you money before doing so. A new home will bring new closing costs and possibly a new mortgage, and if housing costs have risen in your area since you bought your last home, you could end up paying more for a smaller place than you would to stay in your old home.
If downsizing is cheaper, it'll help you in two ways. First, it'll free up more cash today that you can put toward retirement, and second, your lower housing expenses will continue into retirement if you remain there.
3. Contribute to Roth retirement accounts when it makes sense
Roth retirement accounts are popular because after you pay taxes on your initial contributions, your money grows tax-free. So you can use this money to cover your living expenses in retirement and the government won't give it a second look, assuming you've had the account for at least five years. Drawing upon these Roth savings could even push you into a lower tax bracket in retirement where you lose less of your income to the government.
But Roth retirement accounts aren't right for everyone. They make sense if you believe you're in the same or a lower tax bracket today than you'll be in retirement. But if you think you're in a higher tax bracket now than you'll be when you're retired, tax-deferred accounts may help you hold onto more of your savings.
Contributions to these accounts reduce your taxable income in the year you make them, but then you pay taxes on your distributions in retirement. You could also contribute some money to each type of account, but you should favor whichever one you think will offer you the greatest tax advantages.
Just stay mindful of contribution limits. You can contribute up to $19,000 to a 401(k) in 2019 or $6,000 to an IRA. Adults 50 and older may contribute up to $25,000 and $7,000, respectively. This limit applies to all of your accounts of that type, not to each account individually. Exceeding these limits will result in penalties, so stay under these amounts.
Your decisions today can affect your future in ways you don't even realize. The sooner you begin thinking about and planning for retirement, the better your chances of retiring comfortably. Consider the three strategies listed above to reduce your expenses in retirement so you have a better shot at saving enough.