Equity markets stumbled in 2022officially entering bearish territory and leaving future retirees wondering if they will be able to finance their golden years.
For these people, there are several ways to approach this new reality of investing. An effective method: reduce living expenses in retirement.
Experts generally agree that cutting expenses in retirement is an effective way to kick-start retirement savings. In fact, retirees who took a conservative approach to spending in retirement were able to maintain their portfolios and even preserve their assets, according to a recent semi-annual analysis by T. Rowe Price. “Our research indicates that a cautious withdrawal approach is an important way to navigate an uncertain market environment, particularly early in retirement,” the report said.
To determine the extent to which spending cuts can extend the life of a retirement portfolio, SmartAsset analyzed the numbers. Here’s what we found.
If you need help saving for your retirement, talk to a financial advisor.
Our analysis
SmartAsset ran the data on three sample retirement portfolios.
Each retiree started with $500,000, but their spending rates differed, which affected how quickly they emptied their retirement accounts.
For the purposes of this study, SmartAsset assumed that the account in question did not carry Required Minimum Distributions (RMD) and the pensioner withdraws only what he needs to live on in retirement. We also assume that this account resembles a Roth IRA in which no tax is due upon withdrawal.
Savings, spending and investment assumptions
To illustrate the saving, spending and investing behaviors of these retirees, we used data to create an average profile on which to calculate the numbers.
Economy: Each retiree has $500,000 in retirement savings. This money will supplement Social Security benefits.
Expenses: This is where retirees differ and what makes all the difference in the length of their retirement accounts.
Retiree A spends $50,595 in her first year of retirement, which means she will start her retirement needing $4,216 per month. This figure is based on the average amount someone aged 65-74 spends in retirement, according to a Fidelity analysis of data from the Bureau of Labor Statistics.
Despite some uncertainty about the future of social security, we assume that it will continue in the future for the purposes of this study. Thus, we have determined that Social Security covers 39% of those expenses each year, based on an average monthly disbursement of $1,657 as of January 2022, according to data from the Social Security Administration.
Therefore, Retiree A enters her golden years by withdrawing $2,559 from her account in the first month to cover her expenses. After that, we assume that an inflation rate of 2.2% will increase the cost of living over time.
Retiree B spends $250 less each month than Retiree A spends. His first withdrawal is $2,309. The same rate of inflation applies and its expenses increase by 2.2% per year.
Meanwhile, Pensioner C has found a way to drastically reduce his monthly living expenses. She may have downsized, canceled a car payment, or moved to a cheaper city. She withdraws $500 less in retirement, starting at $2,059 per month.
Investments: In addition to assuming that there are no taxes or RMDs on this account, we assume that retirees are invested in a diversified investment fund that earns 5% per annum.
Run the Numbers
Retired a. This retiree withdraws $2,559 from her $500,000 account in her first month of retirement. Its expenses increase by 2.2% per year each year thereafter. His savings last for 258 months, or 21 years and six months. If she retires at 65, she will be around 87 before her funds run out.
retired b. To fund her lifestyle, Retiree B withdraws $2,309 from her $500,000 account in the first month. That’s $250 less than retiree A. Her savings last 297 months or 24 years and nine months. If she is 65 when she retires, she will run out of money around 90.
Retired c. This retiree finds a way to reduce her monthly expenses by $500. His first withdrawal is $2,059 per year and his annual inflation rate is 2.2%. His savings last for 351 months, or 29 years and three months. If she retires at age 65, she will be around 94 by the time she exhausts her account.
How to cut costs in retirement
People approaching retirement can turn to decrease spending many different ways. Here are eight effective ways to cut costs in retirement:
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Reduce housing expenses. Consider downsizing, taking on short-term tenants, or moving in with your family.
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Stick to a budget. Reduce expenses where possible and track expenses.
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Sell a car. You may only need one car or be able to live without a car, especially without commuting to the office.
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Reshop insurance. Make sure you get the best rates and purchase insurance that fits your lifestyle.
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Move to a less expensive city or neighborhood. Ask yourself if you can move to a less expensive part of town or to a new town that costs less.
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Take on part-time work or consulting projects. Supplement your income with part-time earnings.
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Limit travel and vacations. Reduce trips or choose off-peak hours and staggered holidays.
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Limit financial assistance to adult children if possible. Consider how your adult children can support themselves and chart their path to 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 some grounded calculations about whether you can afford to retire on time.
Conclusion
Despite market volatility, there are effective ways to extend the life of your retirement savings. One is to reduce the cost of living in retirement. People who can make big changes to their lifestyle — from downsizing to working part-time — can see their retirement funds last much longer.
Retirement Planning Tips
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Planning for retirement can feel like solving a complicated puzzle, but you don’t have to go it alone. A Financial Advisor can help you assemble the right parts 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 difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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Social Security plays a vital role in the retirement plans of many. By delaying Social Security beyond your full retirement ageyou can increase your benefit by up to 8% per year until you reach age 70. Social Security Calculator can help you determine the best time to claim your benefits.
Questions about our study? Contact [email protected].
Photo credit: ©iStock.com/Dean Mitchell
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