Enjoy a low-cost retirement

Your later years can be golden without being gold-plated. Most retirees are frugal by necessity, but they're no less happy.

By U.S. News & World Report

Having spent much of his career helping others with their finances, Don Peterson knew the importance of saving as much as possible before retiring. But when the stockbroker left the work force in 1988, he realized that retirement wasn't just about money.

In his case, Peterson, now 82, retired a bit sooner than he had planned -- and with less money in the bank.

But that was partly due to bad timing. Shortly after a few of his investments went bad in the 1987 market crash, his wife, Bobbie, decided it was time to retire from her career as a hospital laboratory administrator. Soon after that, one of the couple's daughters asked them to move from Eau Claire, Wis., to Nashville, Tenn., to be closer to her and the grandchildren.

So even though the Petersons had less than $100,000 in their accounts and just one pension between them -- hers, which paid out only around $500 a month -- they quit their 9-to-5 lives and shuffled off to Music City.

Their challenge was one that millions of older Americans are faced with every day: finding a way to lead a comfortable and, yes, happy retirement with only a modest nest egg.

For the vast majority of today's older workers, this is the reality of retiring in America. While financial planners and retirement experts debate how many millions of dollars families should save -- and how to invest that money to make it last -- most households are retiring on meager sums. Nearly two-thirds of workers 55 and older have less than $100,000 saved for their golden years, according to a recent study by the Employee Benefit Research Institute. And 56% of those workers who are already retired have less than $50,000 to last them for the rest of their lives.

Learning to cut back

Yet somehow, "people often find a way to get by," says Gayle Oboy, a financial planner in Marion, Ohio, who works with many middle- and working-class clients. "They adjust. They find ways to cut back but still be content."

In fact, studies show that more than 60% of seniors find retirement "very satisfying." Most say retirement is more satisfying than their working careers were.

Sometimes, it does take a bit of creativity. The Petersons, for instance, leveraged two assets they had -- time and a love of animals -- and started a pet-sitting business after "retiring" to Nashville. It wasn't a glamorous job -- "my wife jokingly says I have a Ph.D. in cat litter," Don Peterson says.

But the modest income they derived from dog- and cat-sitting "made all the difference in the world," he says. "It helped pay for the groceries and helped cover property taxes." It also gave the couple the freedom to retire on their own terms.

Those who don't want to or can't work during retirement are starting to take advantage of another asset: their homes. Thanks to the run-up in home values during this decade, some retirees are starting to downsize to cheaper digs and using the remainder of their home equity to finance retirement, says Jean Setzfand, the director of financial security for AARP, the nation's largest advocacy group for older Americans.

Others are choosing to relocate to less expensive parts of the country, which is what the Petersons did. "It's an insurance policy of sorts," Setzfand says.

What's more, a small but growing number of seniors are opting to supplement their retirement income through so-called reverse mortgages. By taking out this type of loan, you can receive a certain amount of your home equity in a lump sum, a line of credit or monthly annuity payments for life -- while still living in your home. And you don't have to repay the loan so long as you live in that house.

The catch is, when you die or move, the proceeds of the home sale will be used to repay the mortgage. And you have to be at least 62 and own a single-family residence to qualify for a government-insured reverse mortgage.

Because this involves the eventual sale of your home, Setzfand says, this strategy shouldn't be taken lightly. And keep in mind that like an annuity, the terms of the reverse mortgage will improve the longer you wait to take one out.

Of course, the simplest solution for some retirees is to find ways to limit spending --without sacrificing their retirement experience.

Take Gary Hutson. After retiring in 2001 following two decades as a railroad union leader, the 65-year-old now spends his time in far less stressful circumstances. Hutson and his wife, Kathy, are both artists in Spokane, Wash., and they use their free time -- and the serene backdrop of eastern Washington -- to paint wildlife scenes, carve wooden and metal sculptures, and do beadwork.

When the Hutsons aren't creating artwork, they find plenty of other low-cost activities. For example, "we love garage sale-ing," says Kathy. And they also take frequent trips to a cabin they inherited on a lake 45 miles away.

Watching expenses go down

The good news for cost-conscious retirees: "All the numbers show that you don't need the same amount of money in retirement as you needed before," says Alicia Munnell, the head of the Center for Retirement Research at Boston College.

Once you retire, you stop saving for retirement. Your taxes are often lower because your income is likely to drop. "And you don't need to buy work clothes or take transportation to work," Munnell says.

Workers making $40,000 to $90,000 a year need to replace about 75% to 80% of their pre-retirement income, on average, according to a 2004 analysis by Georgia State University and insurance giant Aon. So if you earned $40,000, you would need to generate about $32,000 in annual income to live as comfortably in retirement as you did during your working career.

And for the current generation of retirees, Social Security still covers around a third to more than half that amount, depending on income. So if you earned $40,000, you may need to generate only about $11,600 a year on your own -- or through a pension, if you have one -- to maintain your standard of living in retirement.

OK, but what if you still fall short?

"The answer with the biggest payoff is employment," Munnell says. Not only does finding work boost your current income, but it also delays having to tap your personal resources. And the longer that you can keep money in tax-deferred accounts like 401(k)s and IRAs, the better. Plus, by working a bit longer, says Rande Spiegelman, the vice president for financial planning at the Schwab Center for Investment Research, you may be able to wait before drawing your Social Security benefits.

That's what Marlene Adams did. A decade ago, the Torrance, Calif., resident was all set for a traditional retirement when the utility company where she worked offered her a modest buyout package. Adams was then 55 and thinking of funding her retirement with private savings first, followed by early Social Security benefits.

But after talking to a financial planner, she took a temp job instead, and it eventually turned into a full-time position working in customer service for an air-freight company. By doing so, Adams was able to hold off on taking Social Security until her full retirement age of 65 (that age has been pushed back to 67 for those born in 1960 and later). And that increased her Social Security payments from around $1,200 a month to $1,650.

Now, after paying her rent, she still has about $500 left over each month, and that's not counting her personal savings. "I feel like I'm blessed," says Adams, who is close to retiring for good.

To be sure, not everyone can find full-time work later in life as Adams did. In fact, many workers mistakenly assume they'll be able to keep working to cover any financial gaps. A recent Employee Benefit Research Institute survey indicated that most workers plan to retire at 65 or older. But in reality, nearly two in three Americans wind up leaving the work force before they reach 65, often because of unexpected health problems or layoffs.

Working for spending money

But even if you can't work full time, small jobs can help. Just ask Roy Walls, another Californian. Walls, a former equipment manager for an aerospace company, retired in 1999 at 62 with an early-retirement package. Between his pension and Social Security, he and his wife, Loretta, lead a relatively comfortable retirement. Still, Walls decided to take a part-time job as a crossing guard for a nearby school district. During the school year, Walls helps kids cross the streets near his home for about an hour and 15 minutes each morning and 45 minutes in the afternoon.

The job pays less than $5,000 a year. But that money helps cover the cost of dinners out and movies on the weekend, Walls says. And it allowed him to recently help a son out financially, without having to dip into his savings.

For those without pensions to fall back on, earning even a few thousand dollars a year can be the difference between outliving your money and your money outliving you. Academic research shows that you probably can't afford to withdraw more than 4% or 5% of your nest egg each year. That means if you saved $250,000, you could withdraw no more than $12,500 annually.

But what if you needed $17,500 a year -- in addition to Social Security and other benefits -- to maintain your lifestyle? Well, says Schwab's Spiegelman, instead of tapping 7% of your account, which might deplete it too quickly, why not get a part-time job paying $5,000? That way, you can keep your withdrawal rate at the safe 5% level and still meet your income needs.

It's one of the ironies of retirement, Spiegelman says. Workers are taught that to retire well, they need to save huge amounts of money. "Yet small amounts of money can still make all the difference," he says. And that's what a new generation of retirees is finding out.

This article was reported and written by Paul J. Lim and Emily Brandon for U.S. News & World Report.

Published May 24, 2007