What can you do if you’re running out of money in retirement? Even those fortunate enough to have a comfortable nest egg could find themselves feeling financially squeezed at some point.
If that happens, what should you do? At the simplest level, there are two solutions: (1) reduce your expenses, or (2) increase your income.
Reducing expenses, living more modestly, is the medicine that many retirees will need to take at some point in their future. It’s the solution most under our control, and the one we’ll have to accept if there are no other choices. The main question is whether you can do it on your terms, while preserving what’s most important to you, or whether you’ll have it forced on you by events.
Below, I’ll explore what you can do to reduce expenses in retirement, or any time. Later, I’ll explore the other solution to running low in retirement: increasing your income. For that, you could try returning to your career to work longer. But generally, that’s only feasible early in retirement, if at all. You can also try to increase the return on your savings. That too is risky. Ultimately, there are only a few safe ways to boost retirement income, and I’ll discuss them in my next post….
Having a Plan
When I retired at age 50, I couldn’t really be certain that we would have enough money to live comfortably for the next 30-40 years, or longer. Yes, I ran a bevy of retirement calculators. But that’s a long time into the future for any prediction to hold true. So, what really gave me confidence to retire early was not the calculations, but having a backup plan. I knew if things didn’t go as expected, there would be something I could do about it.
A retirement backup plan is your last resort and one of your most powerful tools for achieving confidence in the retirement decision. It gives you an action plan to continue living a modest but comfortable life, if the absolute worst economic scenarios do materialize. So, what is the essence of a plan?
You should gear your retirement backup plan to the baseline income you would need to cover your essential living expenses. This is the minimum you need for food, shelter, transportation, and medical care, and not much else other than free, frugal fun. You hope retirement never comes to that, but it’s impossible to achieve complete certainty about life decades down the road.
The best strategy is to plan and hope for the high percent of outcomes that allow you more comfort and luxury in retirement, but also to be prepared for a certain percent that don’t. If you’ve thought in advance about how you can gracefully transition to a reduced lifestyle, then chances are you will be able to do it with minimal impact on your overall happiness, should circumstances require it.
To be effective, a backup plan must make a substantial difference in either your cost of living or your income. And, addressing both would be best. Also, to be realistic, the plan needs to be entirely under your control. It can’t rely on good fortune, the benevolence of others, or external economic conditions to work.
Cutting Discretionary Spending
In most cases, it’s easier and more realistic to cut expenses in retirement than it is to drum up more income. So let’s explore cutting expenses first. There are two primary strategies that can make a substantial difference in your cost of living. Each you can implement entirely on your own. Let’s start with discretionary spending….
Could you cut your retirement living budget by a significant 10-25% if necessary in bad years? I know we could. That’s because about 20% of our retirement budget is “recreation” – dining out, entertainment, gear, and travel. We could live without these for a period, without suffering greatly.
We love to eat out, but we can get just as much enjoyment from preparing delicious, healthy food at home and “dining out” on our lovely back patio. Our main entertainment expense is watching first run movies at the nearby theater. But we could live without those, while enjoying the seemingly infinite catalog of older movies and TV shows in our Amazon Prime subscription. I like using the best outdoor gear, and we’ve upgraded significantly here in our early retirement. But, at this point, we are pretty well outfitted for a lifetime of cycling, hiking, climbing, and camping adventures. Further upgrades are optional. As for travelling, we’ll never stop completely, but we could cut back significantly by reducing the distance of our trips. There are a wealth of attractions within a half-day’s drive of our ideal retirement location here in Santa Fe. We could also eliminate all fancier accommodations in favor of camping, which we love anyway.
How about you? Can you identify your largest discretionary expenses and prepare yourself to live without them, if necessary, for a while in retirement? If, like us, recreation is your largest category, then realize how much leverage you have over this expense. The key is to create a lifestyle that is inherently recreational, without any required extra expenses. Live in a beautiful location that offers free or cheap recreation opportunities outdoors. Walk or ride bikes. Hold potluck dinners with friends and stream movies over the Internet. If you set up your life intelligently, then having to live this way for a few years while the economy is down would be no hardship. In fact, it could even be fun! (It sounds like the college years to me, and those were some of the best of my life.) The change in routine could be the perfect prescription to invigorate your retirement!
The second expense strategy, one of the biggest levers that most people can throw in their retirement, relates to shelter.
If you live in a McMansion, you can downsize to a modest house. If you live in a house, you can downsize to a townhome, cabin, or condo. If you live in one of those, you can downsize to an apartment. If you live in an apartment, you can downsize to an RV. (Comfortable, dignified RV living costs so little that it is available to virtually anyone who has managed to put away $10-$20K in equity for a used rig, and worked long enough to get Social Security and Medicare.) And if none of those options work domestically, you can explore retiring overseas, where less developed countries sport large retiree populations, all the amenities — including good health care, and a substantially lower cost of living.
For a simple but common example, consider that many prospective retirees own half-million dollar homes in popular neighborhoods near the coasts or in the big cities. By contrast, it’s entirely possible to own an attractive two-bedroom house or condo in a smaller town with a beautiful setting for $200K. Don’t believe it? Search Zillow.com for lovely Pagosa Springs Colorado, where we recently visited. As I write this, I count 30 properties with at least two bedrooms in or near downtown, for under $200K.
In this example, downsizing would net you about $300K. That could be used to generate more retirement income. At a 4% withdrawal rate, available by annuitizing if not by safe withdrawals, the downsizing transition nets you $1K/month in extra retirement income!
What if you don’t own a larger home in an affluent neighborhood? Regardless of your financial status, most people can dramatically reduce their cost of shelter, if needed. In their book The Clash of Generations, Scott Burns and Laurence Kotlikoff show that a retiring middle-income couple can increase their annual spending by more than $13,000/year by selling their home and becoming renters. And, if they become fulltime RVers, they can boost spending by another $10,000/year. That’s a lot of cash that could go to maintaining or improving the balance of your lifestyle, simply by downsizing your home.
Would these shelter choices be unwelcome for some? Possibly. But that perception is entirely under your own control. In many cases, it’s simply a matter of relocating to a less expensive area — nothing else about your lifestyle needs to change. There is a virtually infinite supply of potential locations and homes in the world. Surely one has the right conditions for your happiness? Relocation is a modest sacrifice, given that it could ensure your financial survival.
No matter the bottom line on your assets, to enjoy a truly secure retirement you should prepare for the unexpected. Having a backup plan that can lower your expenses or generate more income is a wise step. Here I’ve discussed ways that just about anybody, at any time, can reduce their expenses by downsizing housing or cutting discretionary spending. In my next article, I’ll discuss the few ways you can increase your retirement income without having to game the market or rely on the charity of others….