Recently, I was asked a great question: “What is the #1 thing I can do to increase my odds of retirement success?”
Most people are inclined to focus on the portfolio since it gets all the love and attention in retirement planning - how can you optimize your portfolio, pay less in taxes or squeeze out more return?? But when it comes to retirement planning, often the easiest way to increase your chance at retirement success is to concentrate on your expenses, not your portfolio.
Before anyone accuses me of spend shaming, I’m not talking about skipping the lattes as is all the rage these days. I’d prefer to provide concrete examples of ways you may reduce your expenses without sacrificing your quality of life. In other words, where are the lazy dollars?
But before I get to those ideas, let’s briefly discuss how small reductions in your spending might positively impact your overall retirement. For example, if you could reduce your monthly recurring expenses by just $500 per month, here are two ideas you could consider with those savings:
- You could take the $6,000 per year in savings ($500 x 12) and take an additional vacation (or two).
- You could improve the health of your retirement portfolio by living on slightly less.
It surprises most people to know that reducing your spending by just $500 per month is roughly the equivalent of a portfolio of $150,000 based on a basic 4% withdrawal scenario - meaning it would require roughly $150,000 to reliably generate $500 per month. That’s mind-boggling to me. Thinking of it that way, you can see the tremendous impact that reining in recurring expenses can have.
By making simple choices to reduce your expenses, you’ve opened up additional spending options for yourself and/or increased your retirement security. And reducing your expenses by $500 per month or more may not be as difficult as it sounds. Let’s talk about some ideas from my own household budget as well as some I’ve seen for clients.
Ideas to Reduce Expenses Without Sacrificing Your Quality of Life
(1) Cut Cable
This doesn’t mean you no longer have quality programming. My wife and I used to pay Verizon $190 per month for internet and cable. We retained Verizon for the internet and subscribed to Hulu with Live TV for just $90 per month total cost. We would have been closer to $60 if I didn’t care about live sports. But alas, this is about not sacrificing quality of life, so we kept it.
I’ll tell you we have not looked back! We have loved our streaming set up and have not missed cable one bit!
Monthly Savings: $100
(2) Changed Security Service Providers
We previously used Guardian for our home security system. It was $35 per month. We changed to SimpliSafe to $15 per month. There was an upfront investment for the equipment, but after 10 months, we’ll be in the positive by about $20 per month.
Monthly Savings: $20
(3) Shop at Trader Joe’s / Aldi / Similar Grocery Chains
Having shopped for most of our lives at traditional grocery chains, we’ve recently started shopping more at Trader Joe’s. While I have to estimate our cost savings here, I’d say our grocery bill has decreased by about $150 per month. And a nifty side benefit - we’re eating a little healthier as well.
Monthly Savings: $150
(4) Hanging On To Our Phones
This one isn’t quite as sustainable as the ones above, but we’re saving too much not to mention it. Our cell phone contracts have been up for months (close to a year in my wife’s case). But, instead of heading out to get new phones, we’ve been hanging on. Since the monthly expense of paying for the phones ended, our mobile phone bill dropped by $70 per month. Unless my phone breaks, I don’t envision getting a new one any time soon.
Monthly Savings: $70
(5) Get New Home/Auto/Umbrella Quotes
We decided to shop around to see if we could save anything on home/auto coverage. And we certainly could. We used to pay about $300 per month for all our liability coverages. Once we switched, our bill was reduced by about $100 down to $200 per month for the exact same coverage.
Monthly Savings: $100
Just these savings alone amount to $440 per month or an equivalent portfolio need of about $130,000. As a family, we are pretty frugal so we didn’t find a ton of cost savings elsewhere, but perhaps you could. I’d encourage you to look at each of your monthly budgetary items and see where you could save. Just Google, how to save on ____, and I’m confident you’ll find unique ways to save.
But wait, there’s more!
Bigger Commitments = Bigger Savings
Above I noted five typical household savings ideas, but if you’re nearing retirement, I want to share four potential bigger changes you could make that could amount to significant savings.
(6) Pay Off Your Home
A question I regularly get is, “Should I pay my home off before retirement?” In most cases, I believe this answer is yes. Generally, the only time it isn’t is if you have large pensions that more than cover your recurring expenses including your mortgage. Otherwise, I believe it makes sense to pay it off.
This is generally because of the same math I used above. Perhaps you have $100,000 left on your mortgage and your payment is $1,000 per month. It would take $300,000 in your portfolio to maintain that payment on a recurring basis versus just paying the $100,000. Plus you get the side benefit of less stress because you own your home outright.
(7) Downsize Your Home
If you aren’t emotionally attached to your home and your home is larger than you feel you need, you could always downsize. This could have the net effect of lower property taxes, insurance costs, utilities, and upkeep. Here in Pittsburgh, our property taxes are significant, so $1,000 per month in savings is very much possible depending on where you live.
(8) Reduce the Number of Residences (if applicable)
Many folks I know maintain two homes in retirement. It’s especially popular around Pittsburgh (and the Northeast in general) because of the relatively harsh winters. One idea would be to sell the second home and obtain a long-term rental for the winter months. Even with the rental costs, you could save significant dollars over owning, not to mention the removal of stress during hurricane season.
(9) Reduce the Number of Vehicles
I also know many retired couples that maintain three vehicles. Moving to two cars could save maintenance, insurance, and general upkeep.
The goal of this exercise isn’t to become a minimalist, but to manage your expenses in a way that aligns with your values. If you love to travel, perhaps reducing your lazy dollar expenses is a way to further increase your travel pursuits.
If you love owning your second home (or any of the above items), then, by all means, continue to do so. But if you find any of these items to be a pain, it may be an indication to consider the alternative - which can turn into significant savings.
Finding ways to save in your monthly expenses can be a relatively easy way to increase your quality of life overall and potentially tip the scales in your favor for retirement success.
I hope you found an idea or two to take action on!
Note: I do not endorse, nor am I paid by any of the providers mentioned. These have just been my experiences.