How to Spend Less in Retirement: Fewer Lattes or The Big Cut?

A huge concern for people as they approach retirement and when they’re in retirement is: How can I ensure I don’t outlive my money? One way to try to avoid that unsettling prospect is to figure out ways to spend less in retirement so the money you do have lasts longer.

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Doing so can be a big help. As William Gale, director of the Retirement Security Project at the Brookings Institution, recently said in a Brookings webinar, many of us will spend one-quarter to one-third of our lives in retirement.

The new episode of the “Friends Talk Money” podcast for people 50+ that I co-host with Terry Savage and Pam Krueger offered suggestions, with help from Steve Vernon, a research scholar at the Stanford Center on Longevity and author of the excellent new book, “Don’t Go Broke in Retirement.” (You can hear the podcast wherever you get podcasts or listen to it at the end of this article.)

Vernon said he recommends using the “magic formula” for retirement income security: I > E. That means making sure that your retirement income (I) exceeds your expenses (E).

To figure that out, Krueger (co-host of MoneyTrack on public television and founder of the financial adviser vetting service Wealthramp.com) said, you need to do a cash-flow analysis rather than just “point and shoot and guess.” This means knowing what your cash flow in retirement really looks like (or is likely to look like) month in, month out.

Savage, Krueger, Vernon and I talked about two possible ways to spend less in retirement: the “buy fewer lattes” idea and what Savage calls “The Big Cut.”

You’ve probably heard the advice to buy fewer lattes at Starbucks and the money you save will ultimately pour much more into your retirement savings.

It was popularized by David Bach, author of “Smart Women Finish Rich” and co-author of “The Latte Factor: Why You Don’t Have to Be Rich to Live Rich.” He claimed, in 1999, that by not spending $5 a day at Starbucks for 40 years and saving that outlay instead, a woman would have more than $2 million sitting in her account by the time she was 65.

Then, the latte factor notion was debunked by the sharp personal finance writer Helaine Olen, who did her own math. She noted that Bach assumed the savings would earn 11% a year and didn’t factor in taxes on the savings fund.

Vernon, too, isn’t a big fan of spending less in retirement through small, regular expense-snipping.

“People say: ‘OK, I’ll eat out less and I’m not going to buy coffee at Starbucks, I might cut the cable.” And I say: ‘Well that’s good, I’m not criticizing you. But if you have a big gap [between your retirement income and your expenses], that’s just not going to close the gap,’” he said.

Maybe junking the java won’t add up to millions of newfound savings, but Savage (a nationally syndicated personal finance columnist and author of “The Savage Truth on Money”) said she thinks it can still be helpful.

“I call that the nickel/dime approach. And it makes you feel better. And it’s a reasonable thing to do,” Savage said. “But I agree with Steve that that’s not going to get you where you want to go.”

Krueger also urged pre-retirees and retirees to look at ways to reduce small, consistent expenses, such as utility bills.

“I did an energy audit at my house and I didn’t expect anything. I was so surprised. A few hundred dollars a year here, a few hundred dollars a year there, I think those things do add up,” she said.

The Big Cut idea, by contrast, means looking at your largest expenses and seeing which ones you can either eliminate or reduce. The big five: housing, cars, health care, insurance and income taxes.

“It involves things like: How long should we stay in this home? With the property taxes rising, with the sense that there’s going to have to be a new furnace because we replaced it ten years ago and it’s probably got a fifteen- year life. All those kinds of things,” said Savage.

Relocating and downsizing can not only reduce what you spend each month to put a roof over your head. It can shrink or possible end your property tax bills and lower your home maintenance costs.

Savage said the biggest Big Cut you can make is in income taxes. “By moving to a state that doesn’t have an income tax,” she said, like Florida or Tennessee, rather than living in a high-income-tax state like New York or California.

Krueger suggested thinking seriously about ditching your second car in retirement, and possibly cars altogether. “You know, so many people have two cars because they’ve always had two cars. And they don’t even think about that,” she said.

I noted that doing this — if you’ll have good public transportation or access to car services like Uber and Lyft — can eliminate car-loan payments as well as the cost of parking, gasoline, tolls, maintenance and repairs and car insurance.

Vernon also recommended a clever spending-reduction strategy he calls “setting up a Social Security bridge payment.” It’s a two-step process.

Step One is delaying claiming Social Security past your Full Retirement Age (now 66 to 67, depending on when you were born) until as late as 70, since Social Security increases benefits by about 8% a year for each year you do.  This way, you’ll have more retirement income coming and won’t need to cut spending as much.

Step Two, Vernon said, is the bridge payment part. “What you do is you pay yourself from your savings what Social Security would have paid you when you retired. And that enables you to delay your Social Security benefit,  pay yourself from your savings what Social Security would have."

Vernon said he has conducted analyses that showed that a Social Security bridge payment is the best way you can use your savings to generate additional retirement income.

“I think that’s a spectacular idea,” said Savage. “Especially because Social Security benefits will be adjusted upward every year for inflation.”

Richard Eisenberg is the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of "How to Avoid a Mid-Life Financial Crisis" and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Read More