From what I read and hear, lots of folks think that a successful retirement means having at least a million dollar nest egg. I don’t think that’s true. Plenty of baby boomers do not have a million dollars set aside for retirement. Or if they once did, that changed in 2008-2009. Are there strategies for them to retire on less? I think so.
A retirement “rule of thumb” that is often cited is the 4% rule. According to this guidance, a retiree should withdraw no more than 4% of his or her retirement nest egg each year, adjusted for inflation in succeeding years. For example, if you have a million dollars put away, the 4% withdrawal rate rule says that you should withdraw no more than $40,000 from retirement savings in the first year. After that, you can increase the 4% rate by the rate of inflation for succeeding years. If inflation is 3% in your first year of retirement, you can increase your withdrawal rate in year two to 4.12%.
This may work if you have a million dollars and can live on $40,000 plus your pension and/or Social Security. What if you don’t have that million dollars?
Here are some strategies to get you started on a plan for retiring on less:
1. Calculate what you will really need. Don’t use some rule of thumb retirement income replacement ratio that you might read. Instead, create a retirement spending plan that applies to you.
2. Find a less expensive place to live. Yes, there are likely nice places for you to live that can substantially lower your cost of living. These can be in your town or in another state. Maybe you didn’t plan on moving when you retire. Well, maybe things have changed financially. If so, this strategy should be on your list of things to consider. There are some excellent online resources for comparing retirement cost of living and for finding states with low or no income taxes. For even more cost-cutting destinations, consider a foreign country for a retirement relocation. Let’s assume that you find a state where lower income taxes, property taxes, and utilities amount to total savings of $5,000 per year. Based on a 4% withdrawal rate rule, that’s the same as reducing what you will need in retirement savings by $125,000.
3. Eliminate car payments. This is one of the easiest strategies to implement. Next time you are thinking about buying a new car – don’t. Keep the old one. Consider this: If your car payment is $500/per month, you will need $6,000 in retirement income each year to meet those payments. Using the 4% withdrawal rate rule, eliminating that $6,000 income requirement reduces what you need in retirement savings by $150,000.
4. Get and stay healthy. It’s no surprise that older folks tend to spend more on health care. But a lot of that extra expense is caused by an accumulation of poor lifestyle habits. Want to live on a lot less money in retirement? Reduce your future health care spending by using your boomer years to improve your health. Assume that your improved health saves you $2,500 per year in retirement health care spending. That’s like reducing the size of your needed retirement savings account by $62,500.
5. Pay off your mortgage. This can be done by making aggressive spending cuts now and diverting those saved dollars into extra mortgage payments. Or you can downsize to a less expensive place that you can afford to buy for cash, using the equity in your current home. If the mortgage payment you eliminate is $1000/month, that’s the same as eliminating $300,000 from what you will need in retirement savings!
Let’s assume that you successfully followed all of these strategies and achieved the savings I used as examples. Using the 4% retirement withdrawal rate rule, you could theoretically live the same retirement lifestyle you had planned but would need $637,500 less in retirement savings to create that lifestyle!
That’s retiring on less – a lot less.
Not all of these strategies may apply to you. The point is that there are things you can do – now – to help you reach a retirement lifestyle goal on less than you may think.