Top Tips for a Frugal Retirement
Introduction
It’s a fact of life – your money never goes quite as far as you hope. No matter how young or old you are now, learning how to stretch what you have a bit further is an essential life skill.
They say the only certainties in life are death and taxes, but you can safely add bills to that list. We all have them, and they don’t just go away in retirement. Our salary typically does go away, and this can make your finances more challenging once you’re retired and living on a fixed income.
We’ve created this guide to address the budgeting challenges of retirees. Learning a few tips to help you enjoy a more affordable, frugal retirement can help you to stretch your money further and do more of the types of things you want to do.
No matter who you are or how well you planned for your retirement, we can all benefit from being financially responsible with our money. With that in mind, we’ve tried to make sure our advice is applicable to those who planned carefully and have plenty in savings, a pension, as well as social security payments to count on and those who either didn’t or have much less. Here’s what we’ll cover:
- How to get a clear picture of how much you’re spending and where it’s spent
- Understanding the difference between essential and discretionary spending
- Reducing your expenses – both the needs & the wants
- Ways to increase your retirement income
Let’s get started!
Plan Ahead – It Makes a Difference
Before we dig into our frugal retirement tips, we want to take a moment to mention the importance of retirement planning for those who aren’t yet retired. One key to a retirement with fewer worries about your finances is to start thinking about your retirement from a young age. It’s easy to put off saving for retirement until later, but the problem with this line of thought is that later gets here a lot quicker than most people realize.
You will greatly benefit by saving money, paying down debt such as your mortgage, starting a 401(k), and working at a job that has a pension prior to retirement.
Understanding What You Spend
Have you ever wondered where your money goes each month? If you’re like most of us, you have some estimates and rough ideas of what you’re spending and where but lack a clear and accurate picture of your spending habits. If you don’t accurately track what you spend, it’s difficult to take control of your spending and make sure that you’re money is going as far as it possibly can.
There are a few reasons people avoid taking this control. Some simply don’t want to know – “ignorance is bliss.” Others think that it’s too difficult or don’t know where to start.
Taking Action
Since you’re reading this guide, we’ll assume you’ve decided that ignorance is not bliss and that you’re ready to face your fears. The next step is to take action. J.D. Roth, the creator of the personal finance website Get Rich Slowly, identifies the following keys to tracking your spending:
- Commit to the cause
- Keep receipts
- Track your online spending
- Tally everything up
- Be honest with yourself
You’re the only one who can take responsibility for tracking your spending habits. If you’re going to make this work, you need to make a commitment and stick to it.
Set a goal of keeping receipts for every purchase you make for about a month. It may feel like a hassle at first (or always!), and we all know how difficult it can be to look at the receipt for a purchase you maybe shouldn’t have made. Even so, this is an essential step and you need to take it.
Many of our purchases and bills are made & paid online these days, so you’ll need to track these too. Just like your receipts, keep track of every transaction that you make a month at a time.
Gather the receipts and the records of your online purchases and add them together. Do some basic categorization – rent / mortgage, eating out, car expenses, etc – to get more granular detail on your spending habits.
Once you’ve finished up with the first month of tracking your spending, you may feel a bit of shock or embarrassment. It’s easy to make excuses, and it’s essential that you don’t fall into this trap. It’s a learning experience, and you should feel proud that you’ve invested the time and effort to try to get your habits under control. Being dishonest with yourself will get you no where.
Technology Can Help
There are many financial tools out there that can make tracking your spending, and managing your money more generally, a much easier job. In fact, we’ve written an entire guide on just this subject, which you can find here.
These tools simplify the items that we mentioned above – they make it easy to track online spending, they allow you to add cash transactions via the receipts you’re saving, and they make tallying things up & categorizing your purchases a breeze.
Trying out one or more of these tools may even help with your commitment to the cause. By cutting down the time and energy it takes to track spending, you’ll find the task less of a burden. Plus, in our opinion they make tracking your spending a bit fun!
Here are our favorite tools for tracking your spending:
Mint
You Need a Budget (YNAB)
Price: One month free, then about $85 per year
Best for: Zero based budgeting
Get started: YouNeedaBudget.com
Mvelopes
Price: First month free, then $4-$59 per month depending on the plan
Best for: Envelope based budgeting
Get started: Mvelopes.com
Quicken
Price: $35-$65 per month depending on the plan
Best for: Having lots of features and options
Get started: Quicken.com
Essential and Discretionary Spending
There’s a popular approach to retirement planning known as the Essential vs. Discretionary Approach. It separates your spending into an essential category, i.e. things you need, and discretionary, which contains things you want. Although it’s not perfect, it’s a useful way of analyzing spending and looking for ways to save money.
- Your living expenses – things like housing, food, and your water & electric bills.
- Debt payments – loans on your home or car, credit card bills, etc.
- Your taxes – remember those certainties in life we mentioned earlier?
- Travel – anything from long vacations to short drives to see friends & family.
- Entertainment – your cable bills, Netflix account, and tickets to see a movie or the opera.
- Hobbies – fishing trips, a round of golf, those cooking lessons you’ve always wanted.
A few notes about the flaws to this approach:
- Spending within the same category can often vary between essential and discretionary. Take housing for example – you do need somewhere to live, so some amount of housing expense is a necessity. However, things like remodeling costs, replacing furniture with something nicer / newer, and landscaping may fall under discretionary.
- Many of our “wants” are essential to who we are and how we want to live our lives. If you love spoiling your grandchildren, losing the ability to do so will feel incredibly traumatic.
With those caveats, the needs vs wants approach to retirement spending is still a useful tool. It helps provide us with direction and discipline in figuring out how and where to spend our money each month. Without it, budgeting effectively would be far more difficult and failure prone. According to financial planner Michael Kitces:
“This framework can be highly effective in helping people to establish appropriate spending behaviors. Where there is no clear delineation between needs and wants, it becomes difficult to control impulse purchases and make rational spending decisions. When there’s no difference between needs and wants, the only constraint to spending is the amount of money available to spend – leading to the unfortunate outcome where spending on needs and wants-as-needs rises to fill all the available income until there’s simply no money left at the end of every month.
Accordingly, by separating the wants and the needs, spending on needs is done because it has to be, and spending on wants occurs as a trade-off to saving, with the opportunity to apply constructive thought and a proactive decision about whether the next dollar should be spent or saved.”
Reduce Your Expenses
There’s no way around it – cutting down your expenses is crucial to living a frugal retirement. Those weekly or bi-weekly paychecks you counted on during your career are a thing of the past. You should be able to get social security benefits if you are 66 years and 2 months old, or 62 if you choose to receive reduced benefits at a younger age, but your social security benefits won’t be as much money as you received while you were working. With less money coming in, you need less money going out. If you don’t realize this early enough then you risk blowing through your retirement savings, leaving you without a financial safety net.
To help figure out how best to reduce expenses, we’ll use the needs vs. wants framework discussed in the last section.
Saving on the Wants
Start looking at your monthly bills and make reductions on things you don’t need. Examples of this can include your cutitng or downgrading your cable / satellite bill and choosing a less expensive cell phone plan. Next, look at your daily consumables and see where you can reduce expenses. Examples include eating out less, using coupons, and taking advantage of special offers when shopping. You can also look into discounts that your utility company offers. If they offer reduced rates at nights and on weekends then focus on completing energy or water intensive tasks like laundry during these times.
Here are a few of our favorite tips for attacking the “wants” in your budget:
Use the library for your entertainment needs
Most of us love reading books, watching movies, or following a television series. Instead of spending your retirement income on cable, Netflix, and buying new books, you can easily find all of these at your local library. Worried that your library might not have what you’re looking for? You shouldn’t – most libraries have what’s known as an interlibrary loan system, where you can check out books through libraries across the country through yours. Here’s an example in Indiana.
Do your bargain hunting online
Make sure you get the best price on your wants, whether it’s travel, eating out, or buying a gadget that you don’t strictly need. A few minutes of comparison shopping could save you a bundle. A quick check of stores with senior discounts could save you even more. Here are a few resources:
Stores that Offer Senior Discounts
Saving on the Needs
Saving on your wants is the logical place to start, but that doesn’t mean we shouldn’t take a look at reducing our spending on needs as well. By dollar amount, most of us tend to spend far more on essentials like our car, our house, and our food than we do on wants such as travel. By spending wisely on these essentials, you can make a dramatic impact on your retirement spending and make your savings go much further.
Tanja Hester, author of Work Optional: Retire Early the Non-Penny-Pinching Way, “No amount of couponing or thrift-store shipping will give you such a big savings boost all in one shot, so question your housing expenses before you nickel-and-dime the rest of your budget.” This holds true for retirees as well as those seeking early retirement.
Many retirees are living in homes that were purchased they had a family and are now bigger than what they need; others are living in a home that was purchased or rented due to its proximity to work that’s expensive due to location. No matter what the reason, chances are you could save quite a bit by downsizing, moving to a less expensive locale, or both.
As we mentioned in our guide to early retirement, these savings add up: moving from a two bedroom to a one bedroom apartment would save the average American around $250 each month. Over a year, this adds to up an extra $3,000 in your bank account. Not too shabby!
The second largest expense for most people is transportation. Between car payments and insurance, the average American spends around $7,000 per year on their car, and that’s before factoring in costs like gas and routine maintenance.
Here are a few tips for reducing or eliminating what you spend on your car:
- Move somewhere walkable that doesn’t require owing a car at all; of course, you’ll need to balance this with housing costs to make sure the trade off is worthwhile.
- Only buy used cars. Certain models, if well maintained, can even be sold years later for what you paid for them.
- Use your car for as long as you can. Of course, buying the right model of car helps here!
There are so many ways that you can save money on food. Some of them, like learning to cook, can even become highly enjoyable hobbies. Here are a few we recommend:
- Eat out less. This will save you money, and it will also make eating out more enjoyable – it’ll feel like a treat, and you’ll be more conscious of the restaurant you choose.
- Learn to cook. This tip follows from the one above. We’ll also add that learning to cook will give you flexibility with what you buy at the grocery store, allowing you to take advantage of the weekly discounts and deals.
- Make your drinks at home. Those $4 lattes and $5 fruit smoothies add up over time. Coffee, fruit smoothies / juices, and other drinks many of us buy outside the home can be easily made at home with the right equipment.
Growing Your Retirement Income
So far we’ve looked at ways to save money. After all, this is a guide about frugal retirement. That said, we’d be remiss not to cover a few ways that you can increase your retirement income. These are tips that most retirees can use, and a little extra income gives you more flexibility in your spending.
Wait to Claim Your Social Security Benefits
Full retirement age is currently 66 years and two months, and early benefits can be claimed as early as 62. You may be thinking of claiming your benefits early, and if you really need the money then you should definitely claim your benefits. That said, if you wait until the full retirement age of 66 your monthly payments from social security will be higher than they are if you claim your benefits early. Waiting is the better option if you can afford to do so.
Consider Working Part Time
The last thing many of us want to do after retiring is get another job. You don’t necessarily have to go out and get a full-time job, but a little extra income may just be what you need in order to help give you the money you need to be able to enjoy yourself.
A part time job can help make up the difference between the social security benefits you now receive and the paycheck you no longer get. Rather than look at a new job as a burden, look at it as an opportunity to try something new. Try getting a job doing something you are passionate about. Since your financial needs are lower you can afford to take your time and look for a job that interests you.
If you are planning to work after retiring then there are a few things you need to keep in mind regarding your social security benefits. If you’ve reached full retirement age, then there are no restrictions. You can work 40 or more hours a week without having your social security benefits reduced at all. If you haven’t reached full retirement age, then there are restrictions on how much money you can make before your social security benefits are reduced. If you earn below $17,040 per year you are okay. If you earn over that amount, then there is a penalty of $1 reduced from your benefits per every $3 over the monthly limit you earn.
We’ve covered this topic more in depth here: Benefits of Working Later Into Life.
Resources
How to track your spending (and why you should), Holly Johnson, Get Rich Slowly
The Problem With Essential-Vs-Discretionary Retirement Strategies, Michael Kitces, Nerds Eye View
4 Simple Ways to Save Money During Retirement, Joe Young, NASDAQ.com
Work Optional: Retire Early the Non-Penny-Pinching Way, Tanja Hester via Amazon.com
