Reducing living expenses can be an impactful way for pre-retirees and retirees to maintain their portfolios and preserve assets in the face of market volatility.
SmartAsset studied just how much reducing expenses can elongate the lifespan of a retirement portfolio by analyzing three cost-cutting scenarios. In each scenario (see chart below), the retiree starts out with $500,000 saved in a retirement account to supplement Social Security and withdraws only as much as they need to live. The model assumes inflation of 2.2% and investments returning 5.5% per year.
In the first scenario, the retiree withdraws $2,559 per month from her account to cover living expenses. Retiree B spends $250 less per month than retiree A and Retiree C reduces spending by $500 per month. According to SmartAsset's model, Retiree A's savings will last for 21 years and 6 months, while Retiree B's savings will last 24 years and 9 months and Retiree C's savings will last 29 years and 3 months.
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"Our data study shows how intensely expense reduction in retirement impacts the lifespan of a retiree's savings," said Susannah Snider, CFP® and Managing Editor of Financial Education at SmartAsset. "Ultimately, the commitment to reducing spending is the responsibility of the individual or household — an employer or advisor can't sit on a retiree's shoulder and balance his or her budget each month. That said, for some financial advisors, talking clients through some of these big one-time expense-reduction measures such as downsizing or selling a car may be useful. These are one-time cost-cutting decisions that can reduce client spending for years down the line."
Related: 80% of employees are unprepared for retirement: Employers should do more
As the economy heads into bear territory, there are a few ways retirees and pre-retirees can pare down spending, including reducing housing expenses by downsizing, taking on short-term renters, moving in with family or relocating to a lower-cost city or neighborhood. Selling a car, limiting travel and vacations, and cutting back on assistance to adult children are also spending-reduction measures that can have a big impact on preserving retirement savings. SmartAsset also advises retirees to re-shop services like insurance to ensure they are getting the best rates and most appropriate product as well as sticking to a budget.
"For employers, it's worth noting that employees retiring into this economic climate may opt to reduce expenses by easing into retirement — choosing to consult, freelance or work part-time and delay or reduce account withdrawals," noted Snider.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM's Retirement Advisor magazine and LifeHealthPro online channel.
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