How Saving Just $500 A Month For Retirement Could Make You Go Longer

Much is made of the importance of cutting spending in retirement so that Social Security income and savings in retirement accounts last as long as possible. However, many retired workers are confident, because they consider that their consumption habits will not have a relevant impact in their later years. We want to show you how saving $500 per month during your retirement could make your funds last longer.and depending on the case, up to 30 years.

According to a September analysis by T. Rowe Price, an investment firm, retirees took a more conservative approach to spending their retirement funds managing to maintain their portfolios and preserve their assets for longer.

The impact of spending less in retirement seems irrelevant, however, we are going to show you a comparative case of how $500 less in your spending habits in retirement has a very big impact on the performance of your funds over time.

Before sharing the result, you need to understand that this calculation is for explanatory purposes only and that, obviously, does not mean that it applies to all cases, since it depends on different factors such as the amount of retirement savings, required minimum distributions (RMD), taxes, investments, health, among others. Now yes, here is the calculation made by Smart Asset:

Suppose there are three retirees (A, B and C). Each one of them, He started his retirement with $500,000. but everyone spends differently.

Retiree A spends $50,595 in his first year of retirement, which means you’ll start retirement needing $4,216 per month. That figure is based on the average amount a person between the ages of 65 and 74 spends in retirement, according to a Fidelity analysis of data from the Bureau of Labor Statistics. If for the purposes of this example, you have $1,657 monthly Social Security income, that means that you withdraw $2,559 dollars from your account in the month.

Retiree B spends $250 less each month of what retiree A spends. Then, your first withdrawal is $2,309 dollars.

Retiree C significantly reduces his spending, by $500 less than retiree A, so withdraw $2,059 per month. Although it may seem impossible, perhaps this retiree has already paid off his car or has moved to a city with a lower cost of living.

Also, assuming the retirees are invested in a diversified mutual fund that returns 5% per year, these are the results:

Retired A. This retiree withdraws $2,559 from his $500,000 account in his first month of retirement. His expenses increase by 2.2% per year each year after that. His savings last 258 months, or 21 years and six months. If you retire at 65, you’ll be around 87 before you run out of funds.

Retired B. To finance his lifestyle, Retiree B withdraws $2,309 from his $500,000 account in the month. That’s $250 less than Retiree A. His savings last 297 months, or 24 years and nine months. If you’re 65 when you retire, you’ll run out of cash around age 90.

Retired C. This retiree finds a way to save $500 of his monthly expenses. His first withdrawal is $2,059 per month and his annual inflation rate is 2.2%. His savings last 351 months, or 29 years and three months. If you retire at 65, you’ll be around 94 when you deplete your account.

In conclusion of this example, saving in your consumption habits during your retirement can help you keep your funds for a longer time. $500 a month less can make a lot of difference.