You have 2 choices: Reduce spending now or scale back retirement lifestyle
Many Americans are downsizing the traditional vision of retirement as an endless vacation filled with weeks- long trips abroad, daily golf and carefree sailing adventures.
Seventy-eight percent of 45- to 65-year-olds somewhat or strongly agree they’ll need to cut back on spending after they retire, according to an Ipsos/USA Today survey of 1,205 adults in mid-January.
The results partly reflect the less-than-robust state of their nest eggs. Twenty-seven percent of those surveyed have no retirement savings or investments and another 22% have less than $100,000.
The diminished views of their golden years are also rooted in a more vigilant mindset after the Great Recession pummeled home and stock prices and forced millions of unemployed Americans to take lower-level or part-time jobs. Although U.S. payrolls and real estate and market values have more than recovered and hit record highs, many workers never reclaimed their former salary levels, endured sluggish wage growth or simply remain chastened by the downturn.
“I find that to be a (relief) that people are aware they won’t have as much,” says Sheryl Garrett, a certified financial planner and founder of Garrett Planning Network. “We have fewer ostriches with their heads in the sand.”
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Garrett, whose firm serves middle and upper-middle-class clients, adds, “I’ve met almost no one who doesn’t have to reduce their standard of living” when they stop working.
Darrell Childress, 53, an information technology manager who lives in Forest, Va., earns $80,000 a year and has about $120,000 in a 401(k) plan and savings. Childress figures he’ll net about $50,000 in Social Security and investment income when he hangs it up at about age 70, and is aiming the cutting knife at his bevy of tech toys.
He intends to pare back his monthly DirecTV package and cellphone service and drop his satellite radio and Spotify digital music subscriptions. Childress says he’ll also eat out less and save the roughly $200 a month he spends on work apparel.
“It doesn’t bother me,” he says. I’ve always learned to make the best of what I have.” Yet, he concedes, “A small part of me looks at it like – I may really have to change my lifestyle.”
Planners, in fact, argue that paring back is easier said than done. Most workers face difficult adjustments if they have to surrender lifelong creature comforts.
“(People) will maintain (their quality of life) at any cost until they can’t,” Garrett says.
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When Dooley Walker retired in 2011 at age 59 after four decades at a phone company, she planned to keep up her old spending habits. Her $2,500 monthly pension would cover her basic expenses and the $450,000 or so in a retirement account would finance her several thousand dollars a month in designer clothing purchases.
But when she learned her retirement account withdrawals would be taxed at a higher rate, she halted them and instead depleted a $15,000 emergency fund. “I’m used to buying what I want when I want,” says Walker, who lives in Ontario, Calif.
She quickly gave up the shopping sprees but, “I was just sad,” she says. “Here, my whole life I had saved the right way.”
Walker drew Social Security early, at 62, allowing her to resume the wardrobe replenishment “with a vengeance.” “That was wonderful,” she says. Last year, however, she returned to frugal mode because she wants to pay off her condo mortgage and leave an inheritance for her sister. And she finally has made peace with that. “I have everything I need,” she says. “My priority now is to live within what I have.”
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Harold Evensky, a certified financial planner and chairman of Evensky & Katz, a wealth management firm, says that if Americans were psychologically prepared to make do with less “they’d be saving a lot more when they’re working…It’s very dangerous to say, ‘I don’t need to save as much” and put off belt-tightening to a far-off future.
Indeed, Garrett says she helps clients scale back expenditures now so they can live a more comfortable retirement. That’s the approach taken by firefighter Porter Williams, 55, of Kingman, Ariz. He and his wife rarely dine out and take relatively modest vacations. They have $500,000 in savings and Williams will receive a $90,000 pension when he retires in about two years, close to his current $100,000 salary.
He plans to spend about the same amount as he does now or a bit more, but that will include month-long vacations in the U.S. and overseas, and occasionally splurging on fancy restaurants and golf courses. “I have a long-term vision,” he says. “I always put money away.”
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There’s no hard-and-fast rule for how much is needed in retirement. “Somebody may just want to sit on the front porch and rock,” Evensky says. One rule of thumb says workers should expect to replace about 75% of their pre-retirement income. Yet that’s because they won’t need to pay taxes on wages or save money for retirement.
Most people, however, should strive to fully fund their preretirement spending level, Evensky says. While some expenses, such as buying clothes, dry cleaning and gasoline, are likely to fall sharply, costs for travel and recreation typically increase.
“I don’t think they’ve really given much thought to the fact that they’ll have a lot more time in retirement,” Evensky says. “Time for the golf club, time to take cruises, time to visit the kids in a different part of the country.”
One caveat: retirement spending typically isn’t constant, Evensky and Garrett say. It looks much like it did during working years in the first decade of retirement, dips in the second decade as retirees slow down, and may pick up in the third decade as health care expenses increase.
Evensky serves a wealthier clientele with an average nest egg of about $2 million. Many, he says, spend about 120% of their preretirement budgets in their sunset years. “People spend less because they have to,” he says. “People who can afford to do something -- that costs money.”
Still, even some with substantial nest eggs are laying low. Bette Prichard, 65, retired four years ago as a senior commercial real estate manager because of health issues. Her husband, Ron, a former vice president for a steel company, followed within a year. The couple, who live in Brea, Calif., have about $1.5 million in savings and generate about $100,000 a year in investment and Social Security income.
Yet that compares to a combined income of about $300,000 when they were working. And they want to preserve their financial assets for Bette’s health care and a son who will need a large inheritance. So they downsized their house, traded their two luxury cars for one less expensive one, sold a country club membership and now travel across the country in an RV instead of abroad (though the latter was also partly due to Bette’s health)
“It was a big adjustment,” she says. “It’s taken four years but I think we’re truly happy.”