Cutting Expenses Pre-Retirement: Tips To Get in the Habit of Spending Less
Your finances must adjust to your circumstances many times during your life, but shifting from your working years to your retirement years may bring about the most dramatic change. After all, you go from earning, saving and spending to just spending overnight.
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Fortunately, you can prepare for this transition well before your last day on the job. We’ll discuss why tweaking your budget pre-retirement is essential, share which expenses you can cut and offer other helpful tips. That way, you can sail off into the sunset (literally or figuratively) with confidence.
Why Scale Back Before Retirement?
“Cutting expenses before retirement has two primary benefits. Reducing spending frees up money to save and reduces the amount you’ll need to accumulate for retirement,” said R.J. Weiss, a certified financial planner (CFP®) and CEO of The Ways to Wealth.
“For example, if you follow the 4% rule, which states that you can safely withdraw 4% of your retirement savings each year, by reducing your expenses by $1,000 a month, you would need to save $300,000 less. This math shocks many people, but it helps soon-to-be retirees start thinking about the opportunity cost of saving versus spending once they’re close to retirement,” Weiss continued.
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How Much Do You Need To Cut?
So, do you need to spend $1,000 less per month (or more) to retire comfortably? That answer depends on your projected retirement income.
“A vital part of retirement planning is called cash flow analysis, which helps retirees understand how they’ll pay for retirement. How much will Social Security cover their monthly bills? What about their pension, IRA distributions, withdrawals from savings, or another source?” said Jesse Cramer, financial planner and creator of The Best Interest.
“Understanding a retiree’s spending habits is a crucial input into cash flow analysis. If you don’t know your spending, you’re lost — full stop. Some retirees must cut their expenses to make this retirement math work for them. It’s not ideal, but the numbers don’t lie.”
Expenses To Trim Before You Retire
Consider reducing two main costs before you end your career: lifestyle spending and housing.
Discretionary Purchases
“As you near retirement, you want to focus on expenses associated with lifestyle creep. Think travel, eating out, entertainment, impulse purchases, and retail therapy. While rising incomes during their working years allow many people to absorb these expenses without much harm, that rising income is no longer there in retirement, so expenses like these must be kept in check,” Weiss said.
Cramer added, “We all need food to eat and a roof over our heads. But do we need another diamond necklace, tickets to the NBA game, or a membership to the country club? Those are wants, not needs. Discretionary spending is a ‘low-hanging fruit’ that can be trimmed or cut completely from a retirement budget.”
Housing
Many empty nesters and pre-retirees swap their large homes for cheaper, smaller and easier-to-maintain residences.
“Downsizing to a smaller home is a common pre-retirement move, enabling homeowners to profit from the difference between their big sale and smaller purchase,” Cramer said.
Plus, if you own a less expensive house or relocate to a lower-cost-of-living area, you may save a significant sum in property taxes.
In addition, the money you save from downsizing can be used to pay off any other outstanding debt, giving your retirement budget more wiggle room. You can also use the cash to ramp up your retirement savings in the years leading up to that phase.
Which Costs To Slash When You Retire
Your retirement budget may still need some adjustments after your final day in the office. Here are two tweaks you can make:
Transportation
“While a couple might need two vehicles during their careers, they could get away with only one car in retirement. As expensive as vehicles can be, this is a major expense worth investigating,” Cramer said.
Think of all the money you could save by insuring, fueling and maintaining only one vehicle. That cash could give your budget the breathing room it needs — or pay for the dream vacation you’ve always wanted.
Retirement Contributions
Cramer acknowledged that the idea of cutting retirement contributions from your budget may seem odd. However, he said, “Most pre-retirees are putting money away, almost like it’s an extra monthly expense. You don’t need to continue that once you’re already retired. That ‘expense’ can be eliminated from your budget.”
When To Get Started
“Technically speaking, you should run a cash flow analysis for yourself and, if needed, cut these types of expenses as soon as possible. Some expenses, though, only make sense to cut after you’ve retired.
“Others, like the home downsizing expenses, take months (if not years) to plan, shop, and execute. Make sure to give yourself that lengthy timing runway,” Cramer said.
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