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Making Your Money Last

Stretch Your Nest Egg by Cutting Spending

Overspending during tough economic times can jeopardize a retiree's financial future.

EDITOR'S NOTE: This article was originally published in the August 2008 issue of Kiplinger's Retirement Report. To subscribe, click here.

Retirees and those preparing for retirement devote a great deal of time to nurturing their investments. As well they should. But they often neglect the other side of the savings coin: If you spend too much, it doesn't matter how well your investments perform.


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Susan Hirshman, a former wealth strategist with JPMorgan Asset Management in New York City, would like to see newer retirees obsess as much about their spending as they do about accumulating wealth. "All I hear about is performance, performance, performance, and not enough about evaluation of lifestyle," says Hirshman, now a consultant to the financial-services industry.

When markets decline, it's more important than ever for those on the cusp of, or already in, retirement to create a realistic budget and rein in expenses. Spending too much in the early years, especially in a down market, increases the chances that you'll outlive your nest egg.


A widely accepted rule of thumb is that retirees should withdraw no more than 4% to 5% of the value of their portfolio during the first year, with an adjustment for inflation each subsequent year. For many new retirees who are used to spending freely in their peak-earning years, it often comes as a surprise to find that a $1.5 million portfolio produces a first-year withdrawal of just $60,000 to $75,000.

Because they're not prepared for the new reality, many new retirees live beyond their means. A survey by JPMorgan of 1.3 million participants in 401(k) plans it manages found that the average investor withdrew more than 20% a year at or soon after retirement -- a sure way to deplete your savings.

So how can you come up with a realistic retirement-spending plan? Where can you cut back on expenses without significantly altering your lifestyle?

Write it down. Experts are all over the board in guesstimating how much of your preretirement income you'll need to sustain your lifestyle in retirement. Some say 70%, some say 80%, and some warn that you may need more than 100% of your preretirement income after you leave work. You can get an idea of your living expenses in retirement by figuring out how much you're spending now and estimating how outflow will change once you leave the 9-to-5 life behind. Tracking your expenses also makes sense for current retirees.


There are many systems for scrutinizing your spending habits. Quicken and Microsoft Money remain the giants in budgeting software. For a quick snapshot of your spending, use the budgeting tool at Based on bank and credit-card data, the site downloads information on how much you spend every day and tags your outlays by category.

You can also use a spreadsheet or old-fashioned written ledger. Bob Clyatt, author of Work Less, Live More: The Way to Semi-Retirement (Nolo, $18), suggests tracking all of your expenses for at least two months. This would include fitness classes, groceries, clothing, insurance and landscaping services. Write down cash outlays in a notebook you carry with you.

You should group spending by category -- insurance, energy, car and so forth. After the two months are up, Clyatt says, figure out which categories are higher than you had expected. If you're paying a lot for your phones, Internet and cable TV, can you find an all-in-one package? "People mindlessly spend," he says. "By becoming aware, you can make choices that reflect your values and your needs."

Then figure out which categories are likely to decline after you leave work, such as commuting costs, and which ones could increase, such as travel. "People in retirement have more free time, and with that free time comes more spending," says Howard Hook, a certified public accountant with Access Wealth Planning in Roseland, N.J.


Now, compare projected retirement expenses and projected income. For expenses that you expect will fall, see if you can make some cuts now and test drive your retirement budget while you're still working.

Set extra aside. As part of your budget, consider the future costs of replacing big-ticket items, such as the water heater and car, says Henry Hebeler, author of Getting Started in a Financially Secure Retirement (Wiley, $20). By reserving the money in an investment account, you'll be able to pay cash for the big bills in the future rather than paying interest on a loan, says Hebeler, who runs, a retirement-planning Web site. Also, squeezing your spending now means you won't have to cancel a vacation when you need a new roof.

To set up a replacement reserve, make a list of high-cost items with their expected life spans. Say it will cost $20,000 to replace a roof in today's dollars and that its expected life is 20 years. Set aside $1,000 a year. If the roof is already 15 years old, anticipate the looming expense by subtracting $15,000 from the total of your retirement investments.

Slim down. You can probably make many small spending cuts without much pain. Kevin Reardon, a certified financial planner with Shakespeare Wealth Management in Brookfield, Wis., suggests cutting back on restaurant meals. And, he says, "I know of retirees who have gotten rid of their land lines."


Rising costs of food and fuel are taking a big bite from retirees' wallets. William Lyman, 61, a retired kindergarten teacher, and his wife, Roberta, 58, a retired elementary school principal, have found ways to cut the costs of both. The Staten Island, N.Y., couple go out for lunch rather than dinner. "Prices are much lower and portions are more than adequate," Lyman says.

Two supermarkets are within walking distance of their home. They look over the ads for specials and walk to pick up the items at both stores. The trip "saves gas and we exercise at the same time," he says.

The couple has also created another strategy to save gas money. They live near New Jersey, where gas prices are about 40 cents a gallon cheaper than in New York City. Ordinarily, they'd have to pay an $8 toll to get there. "So we pile Mom in the car with us and get the carpool toll of only $2," he says.

Other ways to save on food: Download printable store coupons from the Internet. Kroger supermarkets and Procter & Gamble, for instance, offer coupons, and you can find hundreds more at, and

Another top item on the retirement to-do list is travel. Sure the dollar is weak against the euro, but don't give up that long-planned trip to Rome. Just plan smarter. You'll find the best deals on airfare and hotels if you travel in the months before and after peak season. And you'll save by bundling your airfare, hotel and rental car.

Staying in an apartment in the U.S. or overseas can save a lot. A two-bedroom flat in downtown Rome was priced at $126 to $174 a week on A check of three-star hotels in Rome found daily rates for a double room starting at $150.

On the Internet, fetches the best fares, while posts fire-sale prices. advertises "hot deals" at inns nationwide. At, travel agencies vie to give you the lowest prices for dates, ports and ships you specify.

Go smaller. Downsizing can free up a lot of dollars. Despite the depressed housing market, it's not necessarily a bad time to sell. Depending on where you live, your large home may be holding its value better than smaller houses in some retirement destinations. For example, early this year, Miami had three years' worth of condos for sale.

Ethel Lennon, 62, is considering downsizing. She and her husband, Patrick, 60, bought their colonial-style home in Rockville, Md., outside Washington, D.C., in 1994 with a 30-year mortgage. Their house is now worth at least $900,000. Last year, the Lennons bought a vacation home on the Delaware shore. The house is worth about $400,000.

The couple runs a security-consulting business based in Rockville, and they intend to cut back to part-time in a few years. At that point, they may sell the Maryland house and use some of the proceeds to pay down part of the principal of the Delaware house and invest the rest.

The cost of living is considerably cheaper in Delaware. The Lennons pay $5,769 in property taxes in Maryland, compared with $1,200 in Delaware. Utility bills are also lower in Delaware. Lennon says, "I'm tired of the expenses. If we were retired, we could not afford to live in Maryland."

Many factors go into the downsizing calculation, such as transaction costs and, perhaps, condo fees. Be sure to look at both the pros and cons of moving to a cheaper area, warns Joshua Hatfield Smith, a certified financial planner at SPC Financial in Rockville. "While you may save money by living in a rural area, you may lose money in travel," he says.

You'll also need to factor in any capital-gains taxes you may owe on the sale of your home. Single taxpayers can take up to $250,000 of profit from a home sale tax-free, while couples who file jointly can enjoy up to $500,000 in tax-free profit. Above those levels, though, profits will be hit by the 15% capital-gains tax.

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