The Question Many Pre-Retirees And Retirees Will Need To Answer

Most American pre-retirees and recent retirees haven’t saved enough money to be able to retire full time at age 65 under their pre-retirement level of income. To make up for this shortfall, they’ll either need to work longer, reduce their spending, or do some combination of the two. That’s the conclusion of a recent report from the Stanford Center on Longevity that was prepared before the COVID-19 pandemic and resulting economic turmoil. 

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Unfortunately, the economic downturn caused by the pandemic is making it more difficult for many pre-retirees and retirees to earn income from working. For those people who can’t find work, they’re faced with one strategy to balance their finances: reduce their spending.

What is “just enough?”

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If you’ve found yourself in this situation, here’s the key question you need to answer: How much is “just enough” money to meet your basic living needs and make your life fulfilled and happy? 

All too often, I see pre-retirees and retirees continue their current level of spending, depleting their retirement savings quickly and just hoping that “Somehow it will all be OK.” Then they reach a crisis stage and need to make drastic changes in their lifestyle, which means they’re often forced to make hasty decisions—decisions that may not be their best choice, just their only choice.

A better approach is to take action early by realistically estimating—before you retire—the amount of retirement income you can expect from all sources, including Social Security, any pension income you might have earned, and the lifetime income your savings can generate. This analysis will tell you how much money you have to sensibly spend on your basic and discretionary living expenses for the rest of your life. 

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When I ask attendees of my retirement planning workshops to identify living expenses they might reduce, common responses are “eating out less often” and “fewer visits to Starbucks.” While these steps can certainly help, if you have a large shortfall in your retirement income, you’ll need to find much larger targets for reducing your spending.

Promising targets to lower your spending in retirement

For most retirees, housing is still the largest item in their living expenses budget. This can be the case even if you’ve paid off the mortgage, when you consider all your housing costs such as heating, air conditioning, utilities, maintenance, repairs, property taxes, and homeowners insurance. Examining your housing expenses to determine ways to lower them can lead to a win-win solution if you find less expensive housing that also better meets your needs in retirement. The key question to answer here is, how much is “just enough” house for you to live comfortably and allow you to do all the activities that give you joy and fulfillment? 

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Next up for examining your living expenses: transportation. For example, for married couples, do you really need two cars? Would one car still meet your needs? In the few situations when you might need two cars, could you use car rentals, taxis, Uber, or public transportation instead of having a second car? While using these solutions can be challenging during the pandemic, there are safeguards you can adopt to protect yourself. And do you really need the latest car? How much is “just enough” car to get you where you need to go?

Let’s look at another basic living expense: food. How much is “just enough” food to keep you healthy and happy? Actually, examining your food choices can lead to win-win solutions that might also improve your health. For instance, you could conceivably reduce your food bill by 25% to 33% simply by buying and eating less food, which can also help improve your health if you’re overweight. While you’re at it, try buying less unhealthy, processed, expensive food and substitute it for healthy, low-cost fresh fruits and vegetables. Stop buying soda or sugared juices; when you’re thirsty, drink water free from your tap (don’t fall for the misconception that expensive bottled water is healthier).

By now, you get the basic idea. 

Many people have already significantly reduced some of their living expenses due to the pandemic, such as gas, eating out, travel, and so on. This might be good practice for your retirement years—think carefully about the reductions you’ve made in spending that you didn’t miss as much as you thought you would.

“Just enough” isn’t a rigid formula, and it’s not the same for everybody. It’s more like a guide for your spending and your life. And “just enough” doesn’t need to feel like deprivation—think of your situation as a win-win “green retirement!” You’re helping the planet (and your grandchildren) if you buy less stuff, consume less energy, produce less pollution, and eat fewer foods that require packaging.

Nobody promised it would be easy to retire in today’s world. We’ll all need to make some tough—but necessary—decisions to make our retirements work. And you might feel better if you share your challenges and experiences with family and friends—spending more time with them doesn’t need to cost anything!

StanfordSeeing Our Way to Financial Security in the Age of Increased Longevity – Stanford Center on Longevity

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