Wednesday, April 24, 2013

Inadequate Retirement Account (IRA): Spending Less

NOTE: This is the third post of a series suggesting ways families who haven't saved enough can improve their retirement finances. The initial post was "The Inadequate Retirement Account (IRA)".

For households who weren't able to save enough for retirement one thing is certain: they will spend less after retirement than they did before, simply because they will have far less to spend. A reduced standard of living is inevitable. In fact, many households will drop out of the middle class after they stop working.

Social Security benefits alone won't keep them there. Social Security is intended to replace only about a third of a family's pre-retirement income. For households at the lowest pre-retirement income levels, the number may approach 50%, but that is simply replacing a larger percentage of a much smaller income.

The goal of Individual Retirement Accounts, 401(k) plans and other retirement savings tools is to help families generate enough personal wealth to fill the shortfall between Social Security benefits and the family's standard of living while they were working. For more than 90% of American households, that savings goal wasn't met over the past three decades. 

About half of that 90% has no retirement savings, at all, and living off Social Security benefits alone is a harsh prospect, as is chronicled in this 2012 New York Times article, "The Tightwire Act of Living on Social Security". 

There are thousands of ways to reduce your living expenses after you retire, some useful suggestions and some not. I suggest you Google the topic and see where browsing the Web takes you.

Here is an MSN Money article, for example, entitled "
Retiring? Two Dozen Ways to Cut Costs". However you do it, plan to spend a lot of time thinking about cutting expenses because you can't make retirement work with inadequate savings unless you do some serious cost cutting.
How much will you need to cut? Take your current annual income and subtract any amount you are saving for retirement. Then subtract your annual amount of FICA taxes. This is roughly your current annual spending.
Now go to the benefits calculators and estimate your annual Social Security benefits. The difference between these two numbers is roughly the amount your spending will need to decline, for example:
Some of the cuts you will need to make are necessarily large. Relocating to a less expensive locale has long been recommended. Strongly consider that option if you are in even a moderately expensive region now. (I have a friend who recently retired in Ecuador and seems to be happy with it, though I'm not sure I would recommend something quite that extreme.)

A major expense that you will need to address is health insurance and healthcare. When I retired seven years ago, I was very concerned about how I would pay for my family's healthcare. In fact, it was my biggest concern. Nonetheless, it turned out to be even more difficult to obtain coverage and far more expensive than I expected.

Medicare isn't available until you turn 65, so if you retire early by choice or for reasons beyond your control (there's around a 50% chance that you will have to), finding affordable healthcare will be important. Line it up before you leave the job.

And don't simply decide to risk your finances by betting that you'll stay healthy. By some estimates, more than half of personal bankruptcies begin with catastrophic medical expenses.

Another major expense in retirement will be housing, but mortgages are a complicated issue that deserves its own blog post in the near future.

Still another critical expense in retirement is consumer debt. Don't stop working until you have paid off all credit cards, car loans and similar expensive debt.
Debt is deadly in retirement. Pay it off before you retire and severely limit it after you retire.

So, there you have my recommendations for spending less after you retire. I have intended my suggestions primarily for families who weren't able to save enough for retirement, but the spending part of the advice applies almost equally to those who have:

  • Look everywhere for places to cut expenses
  • Consider moving somewhere with a lower cost of living
  • Figure out where you'll find healthcare until you are eligible for Medicare at age 65
  • Don't stop working until all consumer debt is paid off
I'll cover housing expenses in my next post.


  1. Great post! I enjoy reading your website and have gained knowledge from your posts. The example for estimating post-retirement cost cutting does not factor in 401k, IRA, or defined benefit plan withdrawals during retirement. Including this information would help with cost cutting decisions when beginning retirement.

  2. Thanks for the complement! Glad you are finding it useful. You are correct, the post doesn't include any type of savings withdrawals after retirement, but recall that it is advice intended for households who have not been able to save enough for retirement.

    As I mentioned in the first post of this series, more than 90% of workers approaching retirement have saved less than $200,000. Most have saved far less. (From EBRI.) About half of them have no savings at all. So, the audience for this post will have very little to withdraw (and perhaps nothing.)

    I covered the topic for households with savings more fully in my book and I have probably covered it in previous posts.

    Thanks for reading!

    1. Thanks for your reply, I think I was thinking about my retirement situation only and missed the main point of your post. I ordered your book "Retiring When Your 401k Fails" today and look forward to reading it.