When Margaret Holwill worked for the State Department, she regularly funneled part of her salary into her retirement account. Now in her sixties and semiretired, she’s realizing that Washington’s cost of living can take a toll, despite careful planning.
“I can’t go to the opera anymore—it’s $200 per ticket,” Holwill says. She’s considering selling her Capitol Hill home but is wary of the capital-gains tax, which would eat up a big chunk of the proceeds. She continues to pay hefty property taxes while cutting back on other costs, including vacations. “I just pray stuff doesn’t break,” she says. Still, Holwill doesn’t want to leave the area because of its many draws, including free evening concerts at the Yards Park and shopping at Eastern Market: “You learn to look for the wonderful and inexpensive things.”
As enticing as it is to stay in Washington after retirement, residents such as Holwill also find it takes financial planning to make their nest eggs last.
“We deal with people who have significant amounts of money, and nearly all of them say, ‘I don’t feel wealthy—I feel like I’m struggling all of the time to keep up,’ ” says Kathleen Hastings, a certified financial planner and portfolio manager at FBB Capital Partners in Bethesda. Particularly for retirees with active social lives—eating out, traveling—retirement can strain even well-funded accounts.
In fact, the LPL Research Retirement Index—by LPL Financial, a financial-services company in San Diego—gave the District an F for affordable housing and a C for the financial health of local pre-retirees in its rankings released this summer. Maryland and DC both received a C overall, while Virginia scored an A, thanks to better financial preparedness by its residents and higher rankings for community quality of life.
Expatistan, which rates cities based on cost of living, ranks DC as the second-most expensive city in the country, after New York and before San Francisco. And a Charles Schwab survey of 1,000 Washingtonians released in April found that one in four respondents who currently has a job plans to move away after retirement.
As Holwill points out, even something as simple as catching up with friends or taking family out to eat can be pricey. “There are days I’d love to take the kids out and buy everyone dinner, but it’s not really an option unless you plan it as a big budget item,” says Holwill, who has two grown daughters.
Still, there are lots of reasons why Washingtonians opt to stay put. If you’re among those planning to do so, local financial advisers offer these strategies for making your money go further.
1. Weigh what matters most. Hastings suggests making a list of the benefits of staying in Washington—which might include excellent medical facilities and cultural attractions—and considering them against the costs.
“You might have years of experience living here and don’t want to leave your friends, family, and an environment that’s fulfilling, but you also have to weigh whether you want to support an expensive house in retirement,” she says. Even moving to a smaller home or condominium in the area can be costly after factoring in condo fees and other expenses. Moving somewhere with lower housing costs, including the farther reaches of the area, can mean more funds for travel and other discretionary expenses.
Renting can be a smart option, especially for those who want to experiment with living in a different part of town. Says Kate Fries, a financial adviser at the Family Firm in Bethesda: “If you’re asking, ‘Do I want to live downtown?,’ it can make sense to not drop a huge sum of money on a new property.”
2. Save early and often. As soon as you know you want to stay in the area after retirement, ramp up your savings accordingly, says Marcio Silveira, a financial planner in Arlington. He suggests aiming to save around 15 percent of your earnings throughout your full-time working years: “That’s bulletproof. They can keep their standard of living in retirement if they do that,” even in a city as expensive as Washington. Taking advantage of any employer match, he says, also helps.
3. Pay off debt as soon as possible. In addition to making sure any credit-card or medical debt is paid off before retirement, Hastings says paying off your mortgage can give your budget more flexibility: “Then you’re just dealing with a property tax, and it can give people peace of mind to be mortgage-free.”
Not all advisers recommend such a move, given the tax benefits of a mortgage. Christopher Brown, president of Ivy League Financial Advisors in Rockville, says there’s nothing wrong with carrying a mortgage into retirement, especially if you have an interest rate of 4 percent or lower: “It’s cheap money. Why pay it off?”
4. Understand expenses. Whether you’re already retired or planning for it, Chuck Donalies, a financial adviser in the District, says the first step is to figure out what you’re spending money on.
“You’d be surprised how many people have no idea where their money goes every month,” Donalies says. He encourages clients to use free online resources such as Mint to track spending and to look for places to cut back: “You don’t want to be a hermit and not enjoy lunchtime, but it’s an area you can look at and say, ‘Do I really need to spend on this, or can I put that money into retirement instead?’ ” Saving $15 a day adds up to $75 a week and $300 a month, he points out.
Fries often urges clients to resist buying an expensive vehicle. “That’s a big item they spend unconsciously on,” she says. “Most people can be just as happy with a basic car.”
5. Prepare for spending to fluctuate with time. Fries says retirees’ lifestyles—and financial needs—tend to change as retirement progresses, and she encourages clients to budget accordingly.
“When you first retire, it’s like, ‘Yeah, we’re going to Australia for a month and getting tickets to performances,’” she says. Spending might slow down as older seniors scale back on travel. By age 85 or so, most people stick with smaller trips, if any, but medical expenses can pick up. Older adults often feel more comfortable taking cabs or Uber than waiting at bus and subway stops on their way to a museum or lunch with friends. Expanding the budget for transportation can make it more fun to go out.
All this means that even if you find yourself able to live off of $50,000 one year, you might need $80,000 the next—and can prepare for that by living well within your means even during the more active years of retirement.
On the other hand, some costs—including commuting, lunches, and dry-cleaning—typically decline during retirement.
6. Minimize your tax bill if you sell your home. Generally, married couples have a $500,000 exemption and single homeowners have a $250,000 exemption from the capital-gains tax on the profit generated from the sale of their home. Because so many houses in Washington have appreciated significantly over the decades, many longtime homeowners might find themselves exceeding those exemptions and faced with a significant tax bill.
The tax can be mitigated by keeping careful track of (and receipts for) all improvements done since buying the home; these costs can be applied to the original price of the home to reduce the profit that’s taxed. “The best thing you can do is pull out every improvement you’ve made since the beginning,” says Hastings. Homeowners can also apply eligible costs related to selling the home against the final sale price, further bringing down their tax bill, she adds.
7. Work longer. Brown often runs numbers for clients to compare their expected spending in retirement with their savings and any income they can count on, such as Social Security or pensions. That way, he can identify potential gaps and suggest ways to make up for them. If their retirement plans will cost around $150,000 a year in living expenses and they have $50,000 coming in through Social Security, for example, he’ll calculate how much savings they need to make up for that $100,000-a-year gap.
“First we define their lifestyle, then look at their resources and ask, ‘How much can I pull out of savings without worrying about money?’” Brown says. He typically suggests drawing down no more than 4 to 5 percent of savings a year, to help ensure it lasts. If he calculates that a client needs $2 million in the bank to retire but isn’t there yet, he’ll encourage the person to consider delaying retirement until he or she can hit that target.
“We ask, ‘How much do you hate your job? Can you work a couple more years? How’s your health?’” he says. If you can manage to work longer and save more, you’ll have more flexibility with your spending in retirement. If working longer is not an option, Brown encourages clients to cut their costs instead.
8. Look for ways to bring in extra income. Because Washington is so popular with tourists, if you have a spare room, you could rent it out or use a service like Airbnb to host guests and generate income when you’re off traveling, Donalies suggests. In fact, he did that with the English-basement apartment in his own rowhouse for five years, paying for more than half his mortgage costs and putting a significant dent in his overall expenses.
9. Take a close look at your investment fees. Given that retirees are often sitting on sizable savings, they’re also frequently paying significant investment fees to the firms and professionals helping them manage their money. Thomas Conway, president of Connemara Fee Only Planning, based in Rockville, says households are often unaware of how much they’re shelling out for investing expenses on their retirement funds.
“Many are paying far too much,” he says, and could save thousands or even tens of thousands by selecting funds with lower fees. Looking at a fund’s prospectus or talking to an adviser about the fees you’re currently paying is the first step toward reducing them.
10. Keep generosity in check. Retirees and soon-to-be retirees need to watch how much financial support they give children and grandchildren, Silveira cautions, including for college educations and gifts. “Grandparents like to give out gifts they sometimes can’t afford,” he says. Students can always take out extra student loans to pay for college, but seniors can’t do the same for retirement.
11. Plan cheaper activities with friends. Fellow retirees in the area might be eager to reduce costs, too. Museum trips, visits to nearby wineries, or hiking on a local mountain can be more frugal—and just as fun—as an expensive dinner or live show, Hastings says. Many retirees also volunteer as museum guides or theater ushers, gaining free access to exhibits and performances.
One of Margaret Holwill’s favorite activities in retirement is cooking, which also makes for a thrifty alternative to restaurants: “There are days I think, ‘What do I want to eat? Whose bread do I want today?’ There are so many artisanal bakeries and stores—I can get anything within minutes.”
12. Be a savvy shopper. If you’re redecorating, consider sites such as Freecycle.org, which let you pick up gently used and vintage items at no cost. In affluent pockets of Washington, the goods given away tend to be barely used and of high quality, says Silveira: “Appliances, decoration—there’s a lot of really nice stuff.” He and his wife have used the site in the North Arlington area to save significant amounts on household items. The service can be especially useful to retirees moving into new homes and looking for new-to-them furniture or appliances.
Kimberly Palmer is author of “The Economy of You: Discover Your Inner Entrepreneur and Recession-Proof Your Life.” You can find her at kimberly-palmer.com.
This article appears in our November 2015 issue of Washingtonian.