< Back

Wednesday Welcome: Saving for Retirement? A Few Don’ts to Keep in Mind

This week we’re thrilled to welcome Jeff Yeager, our favorite cheapskate. He offered to share the below post, which is based on his newest book, How to Retire the Cheapskate Way: The Ultimate Cheapskate’s Guide to a Better, Earlier, Happier Retirement. Follow his five “don’ts” and you’ll be well on your way: 

jeff_bioDon’t blindly accept the advice of financial and retirement planners when it comes to the amount of income you’ll need to live on in retirement; their advice is often based on one-size-fit-all formulas that may not apply to you, your lifestyle, or your spending habits… especially if you have a flair for frugal living.  For example, advisers often say you’ll need to have 80%-110% of your pre-retirement income to live on comfortably in retirement—maybe, maybe not.  When it comes to understanding and controlling the spending side of your finances, you must accept responsibility and become your own CFO (“Chief Frugal Officer”), figuring out exactly how much you’re spending pre-retirement and how that spending might change once you’re retired.

Don’t plan on retiring on Social Security income alone – it’s only intended to replace about 30-40 percent of your pre-retirement income. But don’t underestimate how far you can stretch that Social Security income if you’re a smart-consumer and, particularly, if you retire 100 percent debt free.  Many comfortably retired frugal folks I’ve met manage to cover their routine and fixed expenses (e.g., food, healthcare, utilities, housing, insurance, etc.) with their Social Security income alone, using their other savings and income to afford things they “want” rather than the things they “need.”  What I call “Social Security Stretcher’s Syndrome” (“SSSS”) – seeing if you can minimize your spending on life’s true necessities so that your Social Security income will cover them – is a challenging but kind of fun little game played by many frugal retirees.

Don’t overly focus on the investing side of planning for your retirement.  Yes, growing your nest egg is important.  But learning to live within (or even below) your means throughout your working years – in essence “test driving” your retirement lifestyle budget – and, most important, paying off all debt (including your home mortgage) before you retire are every bit as important as the size of your retirement savings.  In fact, “cheapskates” feel so strongly about the importance of retiring debt-free, that they simply say you are not qualified to retire unless you’ve first retired all of your debt. Consider postponing retirement, downsizing your lifestyle, or even selling of some of what you own to pay off debt before you retire – that’s the cheapskate’s advice.  For frugal folks, the greatest asset you can have in retirement isn’t investments or something you own, but rather something you don’t have:  debt.

retire_lg

Don’t assume that in retirement you won’t have any income from part-time work, even if you don’t have any specific plans or interests in that regard before you retire.  Nearly two-thirds of today’s retirees report that they have or plan to work part-time or develop some other form of “earned income” during at least a portion of their retirement years, and a majority of those say that it’s a desire to remain active – rather than an economic necessity – that’s their primary motivation.  Even while drawing Social Security you can earn some additional employment income without diminishing your Social Security benefits; regulations vary, but, for example, if you begin drawing Social Security before full retirement age, under 2012 rules you can earn up to $14,160 in annual wage income without any reduction in benefits.  So many “cheapskate retirees” set out to do just that:  find some enjoyable way through part-time employment to supplement their retirement income by at least that amount.  Many do it quite easily – and happily – by becoming what I call “selfishly employed,” turning a hobby, skill, or other passion into a small, income-producing cottage industry of their own.

Don’t assume that your living expenses will remain constant or necessarily increase even at the rate of inflation after you retire.  Of course everyone’s situation is different, but most retirement planning models are based on the assumption that – perhaps after an initial/modest decrease in spending upon retirement (e.g., you’ll no longer have commuting costs and other work-related expenses, etc.) – your cost of living will stabilize and then gradually increase with inflation.  While for some this may be the case, data from the U.S. Department of Labor’s Consumer Expenditure Survey shows that, on average, personal spending decreases steadily and dramatically for most people throughout their retirement years.  As we age and our lifestyles slow down, we naturally spend less.  We also tend to already have the things we want… or we’ve decided we no longer want them.  With the notable exception of spending on healthcare (which increases as we age), nearly all other types of expenses actually decrease for most people as they age.  And, of course, making a conscious decision to downsize (or what I call “simplesize”) your lifestyle in retirement – or relocate to someplace where the cost of living is lower – can make a huge difference when it comes to living comfortably on whatever funds you’ve managed to save for retirement.

About Jeff: After spending 24 years working in Washington, DC-area non-profits, Jeff realized he’d reduced his dependency on money to the point where he could retire early — or, as he calls it, become “selfishly employed” and pursue various interests. His first book, The Ultimate Cheapskate’s Road Map to True Riches: A Practical (and Fun) Guide to Enjoying Life More by Spending Less, was published in 2008. You can connect with him on Facebook.