Comedian Henny Youngman used to tell a story about meeting with his advisers to discuss his finances and retirement prospects. What Youngman said he told his advisers is, “I’ve got all the money I’ll ever need…if I die by four o’clock.”
But the prospect of running out of money in retirement is no laughing matter. For my book How to Retire the Cheapskate Way, I asked more than 100 happily retired frugal folks how they planned for and manage their finances in retirement to avoid running short. Here are their winning strategies…
Test-drive your retirement budget. Many people wait until they are on the cusp of retirement—or even fully retired—before they crunch the numbers and put in place a realistic household budget based on the actual income they will have to work with in retirement. As a result, their lifestyles often change abruptly as the effect of less income takes hold. Then their newly minted budgets are quickly shelved as they return to their previous spending patterns—a move that can quickly drain their resources.
In contrast, the successfully retired people I spoke with often “test-drove” their retirement budgets in the years leading up to retirement, experiencing what it would be like to live on their projected retirement incomes. This allowed them to more gradually adjust their spending. Sometimes, as a result of the test-drive, they even decided that they needed to postpone retirement, and when they did finally retire, their lifestyles changed very little, making it much easier for them to stick to their budgets.
Fix your expenses to fit your fixed income. Speaking of retirement budgets, the safest model to avoid running out of money during retirement is pretty straightforward. If you can limit your fixed expenses—the true necessities of life, including food, housing and health care—so that your guaranteed or fixed income (such as Social Security and any pensions or annuity income) will at least cover those expenses, you should be OK even in the worst-case scenario. Assuming that you have other, variable income (such as income from an investment account or from working part-time), then that can be allocated for your variable expenses—the “wants” as opposed to the “needs” in your life—or put back into savings. You might ask, Aren’t regular withdrawals from an IRA and other investments also fixed income? If the assets are invested in a no-risk or very low-risk portfolio and the withdrawal rate is ultraconservative based on your potential life span, then perhaps it’s safe to consider that income “fixed.” But otherwise, plan for the absolute worst-case scenario and assume that those funds might not always be available. For people who have lots of money (even millions) in higher-risk investments and think that those investments afford them the ability to splurge on housing, food and other fixed expenses—be careful! You are safe only as long as you move enough money into low-risk investments to cover these splurges. (Obviously if there’s any chance that your combined fixed income and variable income may not cover even your fixed expenses, you have a problem and should consider postponing retirement and/or downsizing your spending to fit within your income.)
Don’t count on Social Security alone—but don’t count it out, either. It’s important to know that Social Security was never intended to be the sole source of income for a comfortable retirement. In fact, the system was designed to replace only 30% to 40% of most recipients’ preretirement income. With the average monthly Social Security retirement benefit currently at $1,360, you’ll be living only a little above the official US poverty threshold if that’s your sole source of income. This is why it’s important to have a pension, 401(k), IRA or other supplemental income before retiring. That said, at the other end of the spectrum, a lot of people planning for retirement—particularly younger people—discount Social Security entirely, buying into the common myth that our Social Security system is nearing extinction. While the issues are complicated and Social Security does face a number of financial challenges, they are not as serious or insurmountable as many people seem to believe. Benefits may be reduced and/or the qualifying ages to receive benefits may be extended by lawmakers, but I’m among the many who strongly believe that if you’re old enough to be reading this article today, you still can count on a not insignificant level of Social Security support by the time you retire. Visit the Social Security Administration’s user-friendly website (SSA.gov) for the latest news on the program and to calculate exactly what your benefits will be under different retirement scenarios. While you should never plan to retire on Social Security alone, you should plan to have it and work to reduce expenses so that you can stretch it to at least cover routine monthly bills.
Retire your debt before you retire yourself. This is a tough concept for many would-be retirees to accept, and some financial advisers beg to differ, at least with regard to paying off home mortgage debt. But my happily retired “cheapskates” take a hard-line approach on the issue of debt, insisting that you should retire all of your debt—including your home mortgage—before you stop working. Once you’re debt-free, you can use the money you would otherwise spend on interest for other things in retirement and you’ve also safeguarded your other assets against creditors (since you have no creditors). In fact, most frugal retirees I interviewed were successful in fully paying off their debts before they retired even if it meant postponing retirement or selling off other assets in order to do so.
Medicare is wonderful, but never underestimate health-care costs. Under current policies, most Americans turning 65 today qualify for Medicare health-care coverage, and that really is an extremely valuable benefit you’ve earned and need to understand (visit Medicare.gov). So breathe a sigh of relief once you’ve qualified for Medicare—but don’t for a minute think that your health-care-cost worries are over. In fact, Fidelity Benefits Consulting estimates that a couple retiring these days will spend an average of $260,000 of their own money on premiums, deductibles and other out-of-pocket health-care costs in retirement. Talk about a retirement nest egg buster! Buying an appropriate Medicare supplement insurance policy (“Medigap”), which covers some of the costs not covered by Medicare, is worth it to hedge your bets. There are up to 10 different types of Medigap plans (depending on your state). When choosing, you should factor in your projected health, lifestyle, risk tolerance, ability to pay and other factors. For help with all that, search for “Choosing a Medigap Policy” at Medicare.gov. And if you can afford it, consider long-term-care insurance, which can cover nursing home costs.
Stay active…and keep earning. Staying active in retirement not only increases quality of life, but it can help keep you healthy and reduce your medical costs. And it also can supplement your retirement income if, like an increasing number of Americans, you choose to work part-time during retirement. A Gallup poll found that about 60% of Americans say they intend to work part-time during at least a portion of their retirement years, and most of them are choosing to do so primarily to stay active, not just to supplement their income. A common scenario for many of my frugal retirees who are under full retirement age is to work at least enough to generate the $16,920 they are allowed to earn annually under current law without reducing the Social Security benefits they are drawing at the same time (once they reach full retirement age, there’s no reduction in benefits regardless of their earnings from a job or self-employment).
That’s smart. Beyond that annual earning threshold, you still will continue to receive Social Security benefits at a reduced rate. So if you truly enjoy your part-time work, go ahead and earn more—that’s smart, too!
Practice income procrastination. As a cheapskate, I’ve always been a proponent of “spending procrastination”—putting off buying something today when you can just as well buy it tomorrow instead. In my opinion, that’s good advice for anyone of any age, but in retirement, “income procrastination” also is an important concept worth considering. The idea is to delay as long as possible drawing on the funding sources you have available to you in retirement (such as Social Security, an IRA or a 401(k) account, reverse mortgage, etc.), both to ensure that you don’t outlive your resources and to allow those resources to continue to increase in value as long as possible. For example, if you postpone drawing Social Security retirement benefits until age 70, under current policies your monthly benefit check will be 32% more than it would be if you started collecting at 66. Of course, most retirement accounts do have required minimum distributions (RMDs) starting at age 70½—but while you have to withdraw a certain amount of money from these accounts starting at that age, you don’t have to spend that money right away! According to the Society of Actuaries, more than half of preretirees underestimate how long they are going to live. Hopefully you’ll be one of the lucky ones who outlives your own prediction—and spends wisely in the meantime.