Retirees Adjusting to Living on Less

I've been retired for five years. Have been living on my Social Security and withdrawing money from savings to pay for all the trips I take. So, WAY less than what I was earning. I have no debt and my home is paid for. Makes a huge difference.

This year I have to take the dreaded MRD from my 401(k). Will be interested to see what the tax implications are next year. That will put me at about 60% of my pre-retirement earnings.

I think the key is that our retirement income will be more disposable income. More fun money! Without a mortgage, high cost of living in New England, higher pre-Medicare health insurance costs, and only a car payment for monthly debt, the budget in retirement will be based on about 2/3 of current joint income. My dad used to say " it is not how much you make, but how much you have left over that counts".

When I retire my income will diminish roughly 80%. That means I will need to live on about 20% of what I am currently making. All I will have will be social security and any else I may be able to make on my own somehow. All of my prior 401k's have been fully depleted, thanks to the economy over the past 14 years. At this stage I won't be able to save enough to make much difference anyway, not that I am financially able at this point to put anything away. To be blunt it sucks. I will never put my money into a stock or market fund again, just too risky, heck even real estate is too risky. If I get to a point before I actually retire that I can save any money then I will do what I can, though at this point it's not looking very promising as retirement is not very far away. I am sure I am not the only one that lost all of their supposed retirement accounts and facing just having social security as income.

I'm trying to live on my prospective retirement income right now, as a test. The extra funds are going to finishing paying off debt. Living on less will be a trade-off for giving up the stress of work. Medical costs are going to be my biggest worry, if I am "retired" early by my employer.

I'd like to know how much to plan on taking out of my 401K. I've seen the recommendations to take out 4% per year. Seems like this plan is intended to leave a 96% balance, since you'd always limit yourself to a 4% withdrawal. I've figured out that a 4% withdrawal at age 66 is the same as dividing my 401K by 25 years (age 66+25 years of retirement = age 91). Instead of withdrawing 4%, does it make sense to divide the balance each year by the number of years of your life expectancy to calculate how much you can withdraw that year? For example, to divide the amount in the 401K by 25 years at age 66, 21 years at age 70, and 10 years at age 81? Also - how do people choose to withdraw their 401K money for the year? Monthly, using dollar cost averaging, or in a lump sum for the year? Seems like it would be more convenient to just put a lump sum in the checkbook at the beginning of the year, but I'm lazy about the accounting associated with multiple distributions..

Ted, this is a great idea! I am 64, but plan to work until 70 in a job I love, pays decently, and is one that a mature person is able to do. I also read your about pre-retirement lifestyle choice in the Cheapskate's Guide to Retirement with great interest. Not many other retirement writers or retirees I've learned from seem to want to recommend that frugality. It makes sense because beyond saving money or paying down debt, it educates one about what to expect on less income; what can be downsized or readjusted to be cheaper or free; what expenses are worth letting go so that other priorities may be maintained; and, could give one a jump start on post-retirement decisions that one may not be able to decide until after that retirement date. I'm going to do the same Thank you!.

This is our first year of retirement and we certainly do not have anywhere near 1/2 mil in assets. After some serious financial challenges, we completely rebuilt our retirement assets the last 8 years we worked by living simply and contributing to our 401ks at the rate of 25% for me and 20% for my DH. Our adviser has now moved us out of the stock market completely, but we have stability and good growth (6.5%) along with reasonable liquidity in other investments. We are lucky in that we have some pension income along with SS and a little annuity income. Plus my DH's former employer has set up an annual HSA for pensioners to draw from for out-of-pocket health related expenses. Who knows how long that will last, but we take advantage while we can. With these multiple income sources, our monthly income now is actually a few hundred $$ higher than our net working income was so we are not taking anything from savings at the moment. With that said, however, we are still trying to get on track with the proposed budget we had developed for retirement. Our travel costs are higher than anticipated so we may have to reign in a bit. Our plan was to not touch savings for 10 years so it can grow a bit and then to take only earnings for a few years. To stay on that schedule we have to get a handle on our spending because we are dipping into our "emergency" savings every couple of months right now. We have two debts that we have accelerated and that is straining our budget a bit as well, but it will be worth it long term because it will be like getting a $600 a month raise when they are paid off in a couple years. One thing we've learned so far is that there is no one right answer - even the best planned retirement needs to be monitored and tweaked as you go. Find a good adviser - you may have to "kiss" a few "frogs" before you find the right one. We tried 3 over 5 years and finally found our "prince".

to Ted: I did not take any withdrawals from my 401(k) until forced to do so by the minimum required distribution rules. I have my accounts at Fidelity and they offer automated annual MRD payments, so that's what I set up. Every December 1 they will calculate the MRD and deduct it from my 401(k), withhold taxes, and deposit the funds in my taxable account. I can write checks on that account or transfer the funds to my regular checking account. I'm sure other brokerage firms offer similar setups. This way I don't have to remember to do it and don't have to worry about heavy IRS penalties.

How did you decide 91 was the magic age? Just about everyone in my family lived past 91, so that's not a number I can use. I simply reinvest the MRD and then draw on it if needed.

I have been living on 65% of my gross income for quite some time now, with a large chunk of my pre-tax earnings going into my 401K account. When I start drawing a pension next year, my net will actually be about 20% higher than my current take home pay. My 401K has done quite well, and will be "play money", as will my Social Security checks. I chose to live far below my means for many years so that I could focus on building my retirement nestegg, and I chose a career that provided me with a defined benefit pension and paid health benefits for life.

Hmmmm...I saved strenuously for many years and left my employment in pretty good shape...right before the bubble burst. I had put 220K into Merendon Mining, which turned out to be a Ponzi scheme. That money was stolen from me and the IRS wants me to pay tax on it. Fun. No prospect of getting any of that money back that I see. I had one small remaining IR.a, under 200K, which I managed to retain. I am also still hanging on through a foreclosure fight on my house in NY. If I manage to win that battle that will be a godsend, but you never know. So for now, all I can count on is my one remaining IRA, my little 400 sq ft mobile home in Tucson, my used Toyota, and my social security. That's pretty much it. If I can get past all the illness that's plaguing me (atrial fibrillation, followed by stroke, along with COPD and diabetes), I hope to get back to work in some capacity soon. I worked for 3 years for H&R block, and thought I would do that again. I'm also looking into various online options. I would like to earn an additional 15k a year, with the goal of putting away 10k of that each year. If I could work part-time for another 10 years, putting away at least 10k a year, I think I could manage. I just don't see any rosy outlook on the horizon. They say social security will last till 2030...15 more year. By then I will be 80. If I have maintained my principle and added to it, I would have around 300k. From there I could probably draw out about 8% a year (24K) and just gradually deplete my money. Skid into home plate on a wing and a prayer. That's what I'm thinking now but you never know what's going to happen...and with inflation who knows?

When trying to figure out how long to plan for (ended up deciding on 25 years, to age 91), I used some of the age calculators. They were pretty consistent. I also considered the age of relatives. One made it to 100, a few passed in their 70s, but the majority died in late 80s. I also weighed the fact that if I'm still around into my 90s, SS, hospice and Medicaid/Medicare are likely to be sufficient to cover the cost of my daily gruel and Depends.

dear Ginger,
I'm so sorry for all the troubles you've been through. Hoping the house remains yours and life gets (so much) better for you in every respect.
ella

Some very interesting comments. I am not retired at this time, but plan on it in the next few years. I have a defined benefit plan, IRA, and ROTH IRA that I will receive when I retire. I am in the middle class status. I invest in good mutual funds that involved stocks and bond funds. I have paid off all my debts, so I don't have to worry about that in retirement. I do not believe any one plan on withdrawal is good for everyone. The old school use to say take 4% each year. What happens in a down period? You have to manage your money based on economic conditions. I pray that what I have done will provide for me in the future.

I was "forced" into retirement by layoff by my employer at 65 three years ago. Since then I've been living on SS and my small IRA at less than half of what I was making. I saved as much as I thought I could during my working years but wish I'd saved more. A previous employer dissolved their pension plan after I worked 25 years there, the employees sued but lost in court. Big companies get their way. We don't have a lot but enjoy retirement. Advice to the younger; Save, save, save.

Here's the problem with save, save, save....and put it where? Where is safe? People used to think 'invest in property'. Not such a good idea anymore, many people have lost their shirt on property, if we have a serious recession, or even depression here...which many economists are predicting...there is no place your money is safe.

dear Ginger,
Those investors smart enough to leave their investments alone during the 2008/2009 financial crisis eventually saw their investments returned to them increased by considerably over 100%. All it took was riding out the storm. This particular investor (me) was not so smart. However, if you spend the $, then there's no opportunity to see your investments grow. I believe in balance.

I agree with Ella. We were fortunate enough to leave everything alone during the recession even though we stressed a lot. My husband worked an extra year to keep putting money in his 401k. The result? Now that we are retired, we are very comfortable. We took our SS at 62 and 65 so we would not have to touch the investments.

Exactly!!! The 2008/2009 financial crisis was gut wrenching. But for those that stayed the course the reward was worth it. On March 9, 2009 the benchmark S & P 500 stock index closed at a low of 666. Today the benchmark S & P 500 stock index is at 2002. I really don't see a lot of alternatives to equities as a basis for building capital. And this does not have to be rocket science. All the individual investor needed was solid index funds that mimicked the markets. Over history the S & P 500 stock index has returned about 8% annually. Of course there will be down markets and financial downturns. But to build capital, equities have to play a part of one's asset base.

Other than the money that was stolen from me in a Ponzi scheme (Merendon mining, Gary Sorenson and Milowe Brost currently on trial in Alberta), I left my money in place and have recovered some, but not all. Don't know how you came out 100% ahead. I don't know anyone who managed that. And my 3 properties all went upside down and haven't recovered. Evidently I'm either unlucky or stupid. Or both. I recognize we don't have a lot of choice other than investments but I still say look out. Just my opinion.

I also left everything alone and it has recovered. Regretfully, Ginger, I think you were just unlucky but it's an important lesson that we are alll just a roll of the dice away from losing the security that we hope for. I am struggling with the 4% recommendation. If you only take out 4% each year, doesn't that mean you always leave 96% of your savings untouched? Theoretically, that 96% could earn 4% each year to replace the withdrawals? Or is the 96% supposed to cover emergencies? I'm not too concerned about leaving the 96% for kids.

Sharon, we have taken more than 4% in the past year, new house expenses! travel! etc. because the market has done well the growth governed all the withdrawals and we actually have more now than a year ago. Our financial advisor said that many people sometimes take more in the beginning years of retirement but then need less over the years. I think 4% is a general guideline and you have to take into account your personal situation and what the market is doing.

I'm going to retire in 2 years. I learned how to make money buying and selling stocks from a former employer. Biggest thing I learned was to preserve my losses and get out after losing 8% and wait for reversal. Also learned that most people do not look at their quarterly statements and think their broker or adviser is there to help them and lookout for them. This feeling is WRONG! Learn how to look at your quarterly statements and take control of YOUR money.

In 2007 my 401k dropped from 300M + to about 180M. I stayed the course, did not get out of equities and I am back to where it was in 07. The key is to stay diversified. In addition the old adage own your age in bonds helped me weather the storm.

Jim...own your age in bonds? Like percentages? So I should have 60% in bonds?

About 4%...I think that is net growth average for a year. In theory you take 4% a year and leave principle for heirs. I'm not doing that. I'm trying to figure how to spend my money by the time I die, hopefully about 30 years from now. Anyone got a good formula for that?

Ginger and others,

This website can provide a great deal of valuable advice about spending logic and rules, etc. It's author is a retired actuary. One of the articles includes a spreadsheet to calculate results just like what Ginger has asked for.

http://howmuchcaniaffordtospendinretirement.blogspot.com/

I am 64 years old. I have usually tried to stay in the 60/40 ratio of stocks/bonds. After the Great Recession I was in the 50/50 range. The Great Bull has pushed me to 70/30. I know I should reallocate. But I keep asking myself how far this BULL will run.

I should expand on my earlier note--to get to the spreadsheets (one excluding Social Security, focusing on annuities, and one incorporating SS), use the dropdown "Articles and Spreadsheets". They require your input as to what you're starting with, likely earnings rate, expected inflation, how much you want to leave to heirs, how many years you want to make your money last to get to that amount, and so on. The key is to annually re-enter data that may change from year to year (e.g., the current value of your retirement accounts, inflation, etc.)

Joe G

Bubbajog,

No one can possibly know. Right?

ella

Thanks for the interesting web site, Joe. Does anyone have good info or a good web site on where to stash cash. Somewhere to put money that needs to remain relatively liquid.

Used to be that brokerage accounts swept money into interest (admittedly not high interest) bearing accounts. And remember the days when money market accounts had high interest? Any good ideas for today?

No Ella nobody really knows, not even the so called experts. That is why within financial markets there are so many contrarian's: Those that do the opposite of what the experts say. When investing in equities the investor needs to stay educated, stay on top of their investments, and make sound decisions.

Ginger - Thats correct. If your 60 years old you should have 60% in bonds. But I would advise bond mutual funds to spread your risk rather than individual bonds. Talk to a fee only financial advisor as to what types of bonds to invest in. With interest rates rising long term bonds can loose value.
Jim

My money is currently in Rbc and I have an advisor there who manages all my investments...not that there's a lot. Love the website and have book marked it.

Ginger, what is "Rbc"?

I think Royal Bank of Canada? They have investment arm here in US