Equity markets have stumbled in 2022, officially entering bear market territory, and leaving soon-to-be retirees wondering whether they’ll be able to finance their golden years.
For these folks, there are a number of ways to approach this new investment reality. One impactful method: cutting down living expenses in retirement.
Experts generally agree that reducing spending in retirement is an impactful way to revive retirement savings. In fact, retirees who took a conservative approach to spending in retirement were able to maintain their portfolios and even preserve assets, according to a recent midyear analysis from T. Rowe Price. “Our research indicates that a conservative withdrawal approach is an important way to navigate an uncertain market environment, especially at the onset of retirement,” the report says.
To determine how much spending reductions can elongate the lifespan of a retirement portfolio, SmartAsset crunched the numbers. Here’s what we found.
If you need help saving for retirement, talk to a financial advisor.
SmartAsset ran the data on three sample retirement portfolios.
Each retiree started with $500,000, but their spending rates differed, which impacted how quickly they drained their retirement accounts.
For the purposes of this study, SmartAsset assumed that the account in question didn’t carry required minimum distributions (RMDs) and the retiree is withdrawing only what he or she needs to live in retirement. We’re also assuming this account is something like a Roth IRA in which no taxes are due upon withdrawal.
Saving, Spending and Investment Assumptions
To illustrate these retirees’ saving, spending and investment behaviors, we used data to create an average profile upon which to run the numbers.
Saving: Each retiree has $500,000 in savings for retirement. This money will supplement Social Security benefits.
Spending: This is where the retirees differ and what makes all the difference in how long their retirement accounts last.
Retiree A spends $50,595 in her first year of retirement, which means she’ll start retirement needing $4,216 per month. That figure is based on the average amount someone between the ages of 65 and 74 spends in retirement, according to a Fidelity analysis of Bureau of Labor Statistics data.
Despite some uncertainty about the future of Social Security, we assume it continues into the future for the purposes of this study. Thus, we determined that Social Security covers 39% of those expenses each year, based on a $1,657 average monthly disbursement in January 2022, according to Social Security Administration data.
Therefore, Retiree A enters her golden years withdrawing $2,559 from her account in the first month to cover expenses. After that, we assume a 2.2% rate of inflation will swell living costs over time.
Retiree B spends $250 less each month than Retiree A spends. Her first withdrawal is $2,309. The same rate of inflation applies, and her expenses grow by 2.2% annually.
Meanwhile, Retiree C has found a way to significantly reduce monthly living expenses. She may have downsized, nixed a car payment or moved to a lower-cost-of-living city. She withdraws $500 less in retirement, starting at $2,059 per month.
Investments: In addition to assuming no taxes or RMDs on this account, we assume the retirees are invested in a diversified investment fund returning 5% per year.
Running the Numbers
Retiree A. This retiree withdraws $2,559 from her $500,000 account in her first month of retirement. Her expenses swell 2.2% annually each year after that. Her savings last 258 months, or 21 years and six months. If she retires at age 65, she’ll be about 87 before her funds run out.
Retiree B. To fund her lifestyle, Retiree B withdraws $2,309 from her $500,000 account in month No. 1. That’s $250 less than Retiree A. Her savings last 297 months or 24 years and nine months. If she’s 65 at retirement, she’ll run out of cash right around age 90.
Retiree C. This retiree finds a way to shave $500 from her monthly expenses. Her first withdrawal is $2,059 per year, and her annual inflation rate is 2.2%. Her savings last 351 months, or 29 years and three months. If she retires at 65, she’ll be around 94 by the time she exhausts her account.
How to Reduce Costs in Retirement
Folks nearing retirement can look to reduce expenses in a number of ways. Here are eight high-impact ways to reduce costs in retirement:
- Reduce housing expenses. Consider downsizing, taking on short-term renters or moving in with family.
- Stick to a budget. Trim expenses where possible and track spending.
- Sell a car. You may only need one car or be able to live car-free, especially without an office commute.
- Reshop insurance. Make sure you’re getting the best rates and are buying insurance appropriate for your lifestyle.
- Move to a lower-cost city or neighborhood. Consider whether you can move to a cheaper part of town or a new city that costs less.
- Take on part-time work or consulting projects. Supplement your income with part-time earnings.
- Limit travel and vacations. Reduce trips or choose non-peak times and off-beat vacations.
- Limit financial assistance to adult children if possible. Consider how your adult children can support themselves and develop their path toward financial independence.
If you’re looking for ways to finance your lifestyle on a fixed income, consider hiring a financial advisor. An advisor may be able to help you understand where there is room in your budget and make grounded calculations about whether you can afford to retire on schedule.
Despite market volatility, there are high-impact ways to lengthen the lifespan of your retirement savings. One involves tamping down on the cost of living in retirement. Folks who can make big lifestyle changes – from downsizing to taking on part-time work – can see their retirement funds last significantly longer.
Retirement Planning Tips
- Planning for retirement can feel like solving a complicated puzzle, but you don't have to go at it alone. A financial advisor can help you put the right pieces together by assessing your needs and connecting you with the services that are right for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Social Security plays a critical role in the retirement plans of many. By delaying Social Security beyond your full retirement age, you can increase your benefit up to 8% per year until age 70. SmartAsset's Social Security calculator can help you determine the best time to claim your benefits.
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