How retired people on fixed incomes can make their money go farther
In January 2023, the federal government increased Social Security benefits and SSI payments increased for 70 million Americans to try to ensure that the purchasing power of these benefits is not eroded by inflation. Social Security benefit increased by more than $140 a month, on average.
"The increase in these payments was a part of the cost-of-living adjustment (COLA)," explains Erica Wright, financial advisor at Northwestern Mutual in Milwaukee, Wisconsin. Despite COLA, she adds, many retirees still struggle to live on a fixed income amid accelerating inflation.
The good news is that there are strategies that retirees on fixed incomes can use to make their money go farther. Some tips may seem obvious, but retirees often overlook them. Discipline and dedication are needed to succeed.
Create a Budget
Financial plans often start with the creation of a budget — for good reason. It is fundamentally important to know how much you earn and how you spend, and relying on memory isn't the best strategy.
The good news is that there are strategies that retirees on fixed incomes can use to make their money go farther.
"Making a plan for how you want your money to be allocated each month can help you stay on top of your finances and ensure your money isn't wasted," says Jonathan P. Bednar II, a Certified Financial Planner (CFP) at Paradigm Wealth Partners in Knoxville, Tennessee.
Knowing your income and tracking your spending enables you to be more thoughtful about what you need versus what you want, Bednarsays. That helps you identify where you can cut spending.
If spending cuts alone are not enough to stretch your income to the end of every month, you could consider changing how much you withdraw from retirement savings.
Financial planners generally recommend withdrawing 4% of your retirement savings each year and add that to your Social Security benefit, pension and other income. "Then, each year you can continue to withdraw 4% from your retirement savings and have a reasonable level of assurance that your portfolio will last at least 30 years," Wright explains.
However, if you're already following the so-called 4% Rule and you struggle to pay bills or enjoy retirement, she suggests that you consider a more personalized retirement income approach.
"It's important to use the 4% Rule as a starting point," Wright says. "However, it is intended to be adjusted depending on your portfolio, age of retirement, taxes and other nuances specific to your financial plan."
She recommends meeting with a financial professional to find a strategy that best meets your needs.
One advantage of being retired is that you don't have to plan your days if you don't want to. However, if you tend to decide what you're going to eat on the spur of the moment, your money may not be going as far as it could.
"By planning ahead, you are able to buy in bulk and only buy what you need."
Taylor Kovar, a CFA and founder of Kovar Wealth in Lufkin, Texas, says that a good way for people on fixed incomes to avoid an empty wallet at the end of the month is to plan meals in advance and buy only ingredients they need.
"So often, we make last-minute decisions about food," he says, "but by planning ahead, you are able to buy in bulk and only buy what you need instead of whatever seems right while at the store." Never shop when you are hungry, Kovar adds, or you will be tempted to buy items you do not need — and this kind of impulse buying can definitely blow your budget.
As you shop, continue to look for ways to stretch your dollars. "Use coupons to save money and consider buying generic items," says John Cunnison, CFA and vice president at Baker Boyer National Bank in Walla Walla, Washington. "The difference in the price of generic versus name brand can be considerable."
Play the Spending Game
Do you enjoy playing along while watching "Wheel of Fortune" and "Jeopardy" on TV? Consider turning spending into a game. Bednar suggests challenging yourself to go an entire week without spending money.
"Buy your gas, groceries and other essentials on Sunday, and then take a spending holiday on Monday through Saturday," he says. "This will force you to plan your spending and help you avoid making quick discretionary spending decisions that negatively impact your monthly cash flow."
Eating Out Is Off the Menu
Dining out — or ordering curbside pick-up — is quick and easy, but the cost can quickly add up if you do it often. Spending $3 to $5 a day at Starbucks might not seem like a lot of money, for example, but that adds up to $90 to $150 a month — for a daily cup of coffee. You could buy a 12-ounce bag of Starbucks ground coffee from a store for less than $10 and make coffee for a month — maybe longer.
"Avoid eating out, if possible — especially since the internet is a wonderland of recipes," says Cunnison. Start by trying to mimic your favorite restaurant meals.
Make Small Adjustments
You can reduce your energy bills by simply turning the thermostat up in summer and down in winter. "Energy costs seem only to be increasing, so investing a small amount in an electric blanket will not only keep you warm, but it will save money by only heating the most important parts of the house — you," advises Kovar.
In the summer, use a fan to cool rooms so you won't have to run your air conditioner excessively. But keep in mind that when the temperature is in the upper 90s or above, fans won't really make much of a difference.
Kortney Ziegler, PhD, founder of WellMoney and a Stanford University Fellow, says there are other small and painless changes you can make to save money and reduce your living expenses.
"This might involve changing to a more affordable phone plan," she says," or just using less energy by unplugging items when they're not in use." Reap long-term savings by replacing any incandescent light bulbs with LEDs, which can use 75% less energy, according to the Department of Energy.
Ziegler also recommends looking for used or slightly used items if you can't afford new versions. "Additionally, you can benefit from the savings provided by merchants with reward programs," he says.
Track Interest Rates
You may have used the same bank for years, but loyalty should be a two-way street. Does your bank pay competitive interest rates on checking, savings and money-market accounts?
"One way to stretch your dollar is to check the interest rate on the dollars parked in your bank account," recommends Bednar. "Since the Federal Reserve started raising rates last year, you can now find high-yield savings accounts, CDs and money market accounts paying 4% or more."
He recommends taking time to shop around for the best rate. "You will be pleasantly surprised by the short-term interest rate you can earn on your cash that you might not be earning on your traditional savings account."
As a retiree, having time on your hands provides an opportunity to do some of the things you've been paying others to do. "Searching Google or YouTube for an answer to a problem can save you hundreds of dollars on repair costs," advises Kovar.
Pay Down Credit Cards
If inflation is on the rise, so will the interest rates you pay. "With credit card interest rates at 20%, if you are paying the minimum payment, you may not be making progress," warns Jay Zigmont, CFA and founder of Childfree Wealth in Water Valley, Mississippi.
"Make getting out of debt a priority. Start by locking your credit cards."
"Make getting out of debt a priority. Start by locking your credit cards (having the bank prevent anyone, including you, from making purchases on your credit card) and not taking out more debt."
After locking the card, start paying back as much as you can each month.
For example, if you have a $6,000 credit card balance with an 18% interest rate, and you pay $150 a month, it will take you 62 months to reduce the balance to zero, and you will have shelled out a total of $3,231 in interest.
But if you pay $300 a month, it will only take you 24 months to wipe out the debt, and you will have paid only $1,186 in interest. While it may be difficult to make larger payments in the short term, you'll have more money in the long run.
Consider Part-Time Work
Several advisors Next Avenue consulted also recommend considering a part-time job to make ends meet or to build a financial cushion.
"While gig work, such as driving for Uber or DoorDash, may look good, keep in mind you have additional vehicle costs, and you will be responsible for paying self-employment taxes," says Zigmont. You may make more money by working part time for a company than by doing gig work, he adds, but the important thing is to do something that you like.
"Employers are desperately looking for good people, and they are willing to be flexible."
Cunnison says that the labor market is very tight right now, which can work in your favor. "Employers are desperately looking for good people, and they are willing to be flexible," he says.
Keep in mind that if you started to collect benefits a year or more before your full retirement age and then you earned more than $21,249 in 2023, the Social Security Administration will reduce your benefit by $1 for every $2 you earn above that figure. If you started collecting benefits less than a year before your full retirement age, you can earn as much as $56,520 before your benefits will be reduced.
Starting with the month you reach full retirement age, there is no limit on how much you can earn and still receive your full benefits.
However, there is also the matter of income taxes on money earned at a job. If you file an individual tax return and your outside income exceeds $25,000 — $32,000 for couples filing jointly — you may have to pay income tax on 85% of your Social Security benefits.
If you still have the large home where you raised your kids, consider downsizing. "So many people would feel better in a smaller, less-expensive house or apartment," advises Cunnison. And a smaller house also has less expensive utilities and repair costs.
Aside from downsizing, you can also lower your expenses by moving to a less expensive part of your state or the country. "Some states do not tax retirement income and may offer a lower total cost of living," says Zigmont.
The savings can be significant. He says that depending on where you go, you may save 30% or more just by moving to a place with a lower cost of living.
Birrell agrees, and says moving to another city, state or even another country can help you extend your purchasing power. "This can be a practical solution, especially because being retired provides the freedom of living anywhere since you are not tied down with a 9-to-5 job," he says.
Review Your Investments
While you are rethinking everything from meal planning to home repairs in search of money leaks, you might want to review your investments to ensure they're working for you.
"This is a very safe and secure way to ensure some cash savings are growing with inflation."
"The primary reason that people invest is to grow or maintain purchasing power and fight inflation over time, but some investments are better than others during inflationary periods," says Cunnison.
He says I Bonds are worth a look. They are U.S. Treasury securities with yields that the Treasury adjusts every six months in response to the inflation rate. They are for sale online at TreasuryDirect. "This is a very safe and secure way to ensure some cash savings are growing with inflation," Cunnison said.
He adds that stocks, over time, have been one of the best inflation-fighting assets, but warns that risk and volatility are the tradeoffs. "Stocks are a very good choice if the funds are not needed in the next five to 10 years," Cunnison says, "and a qualified financial advisor can assist with sizing a position that is consistent with your financial plan."