The Expenses Side of the Retirement Equation


As I mentioned in my last article about spending in retirement, this one is a chapter from my new book, which I plan to self-publish very soon. The book, which will be titled “Redeeming Retirement: A Practical Guide to Catch Up,” is targeted at the large number of middle-aged and older households who realize (or haven’t done the work to figure out) that they are ill-prepared for retirement. This article is a slightly edited version of “Chapter 9: Reduce Your Expenses.” (I’ve also added some annotations in brackets.)

I’ll share more about the book in a few weeks and also tell you how you can get a free copy.


Being able to retire with financial dignity [which I define earlier in the book as having sufficient income to meet all your essential needs, at a minimum] is all about doing what you can do and controlling what you’re able to. As we’ve discussed, many things are out of your control that may or may not impact you. Don’t lose sleep worrying about them. There’s nothing about your present situation, including the aspects you can’t control, that prevents you from acting, step by step. As Winston Churchill said, “I never worry about action, but only about inaction.”

A lot of retirement planning (and this book) is rightly focused on the savings side of the retirement equation. But if you want to save more before you retire or meet your spending needs after, it’s imperative to also look at the expense side of things and take some action there.

The problem with high expenses is that they cost so much—unless you want a pet and buy a goldfish.

As I recently told my granddaughter, a goldfish costs about $10, depending on pedigree; and based on my extensive research, it costs about 74 cents a week to keep them alive. If taken care of, they can have a twenty-year lifespan. That’s about $770 in lifetime upkeep, $780 if you include the purchase price. Compare that to the cost of owning a medium-size dog, which is about $17,000. The longest reported living goldfish made it 43 years, but most don’t outlive the average house cat, for reasons I will divulge a little later in this [article].

Problems with expenses and retirement can show up in two significant ways. First, before you retire, they can make it difficult to save or to save more. Second, in retirement, if you don’t have enough income to cover them. So, in this chapter, we’ll discuss how reducing your expenses, both before and after retirement, can help you retire with dignity. It may be just as important as how much you save and how you invest, perhaps more so.

Simple Retirement Equation

We’ve already looked at several retirement calculations. But in the book Retirement Game-Changers, author and former insurance actuary Steve Vernon introduces what he calls the “magic formula” for retirement income security. You may expect another complex, sophisticated mathematical formula, but I promise this one is straightforward:

I > E

As Vernon writes, “To translate, your income (‘I”) needs to exceed your living expenses (‘E”) for the rest of your life. As you can see, this formula isn’t magic; it’s just common sense.” It applies before and in retirement. If I < E before retirement, you won’t be able to save. If you don’t have enough saved for retirement but try to make I > E, you’re likely to run out of savings much sooner. Vernon uses this simple expression to shift the emphasis from your “retirement number” (how much you need to have saved) to your expenses.

There is another way of looking at income and expenses—your “income replacement ratio” (IRR). Your IRR is the percentage of your pre-retirement income that your retirement income will replace. For example, someone with an IRR of 80 means that they will replace 80 percent of their income before retirement using whatever mix of income they have available in retirement (Social Security, pension, annuity, and withdrawals from savings). It logically follows that the lower your expenses, the higher your IRR for a given amount of income.

If you’re close to retirement and do the work of estimating your actual spending needs in retirement (calculating a more accurate IRR) or already in retirement and tracking your spending, you may not like what you see. A solution is to reduce expenses before retirement, which tends to be much easier to do than when you’re retired.

Reducing Expenses Before Retirement

Those in mid-to-late-career may be in their peak earning years. As our income increases, we want to enjoy our money more; we spend money to purchase goods, services, and experiences that we can enjoy with gratitude and thanksgiving. But, as Dave Ramsey reminds us, some of us “buy things we don’t need with money we don’t have to impress people we don’t like.” It’s better to practice moderation in our spending and keep our fixed costs in check when purchasing big-ticket items like houses and cars, all the more so for those with limited savings.

We also need to be careful with other important spending decisions such as public or private school, vacations, other material possessions, and various lifestyle choices. If we pursue an enhanced lifestyle beyond our means, and therefore fueled by debt, we can get in trouble and save little or nothing for retirement.

The best way to create a surplus as your income increases is to throttle spending as your income increases—i.e., maintain I > E. The earlier you set a target spending level and let it guide your spending decisions down the road, the quicker you’ll reach it. When you’re older, perhaps with a higher income, you’ll be better able to maintain your target spending level, keeping it below your means and increasing your margin for more giving or saving.

You may be ten or twenty years from retirement [and did the calculations I introduced in earlier chapters] and found you’re behind the curve in terms of where you should be for your age. The amount you’re putting aside may not be sufficient for you to retire with dignity. Unless you can increase your income, your only option is to do nothing (not a terrific choice) or to think of ways to cut your expenses so you can save more.

To do that, be honest and ruthless to cut costs enough to make a difference. If you want to increase saving by 10 percent, you’ll need to decrease spending (or increase income) by at least that much. But it’s for a good cause: saving for your future selves in retirement. As Dave Ramsey often says, “Live like no one else so that (someday) you can live (and give) like no one else.”

Rule of 300

Reducing your recurring expenses can go a long way in lowering total spending. I’m referring to regular monthly charges such as phone bills, cable and internet bills, gym memberships, and property insurance. These “feel” small, but they can add up over time. Remember our $780 goldfish? (They don’t call them “gold” fish for nothing.)

But you may wonder why such small expenses would be any concern. Well, I want to introduce you to the “Rule of 300.” The “rule” says that you need to save 300 times a monthly expense to fund it from savings in retirement.

For example, if you buy a $40/month subscription membership to the “Date Night in a Box Club” (yes, that is a thing), you need to save $40 x 300 = $12,000 to fund that membership in retirement. This equation relates back to the 4 percent withdrawal rate, which is the percent of your savings that some academics say you can “safely” withdraw each year with a reasonable chance you won’t run out of money. The inverse of 4 percent (1 ÷ .04) gives a multiplier of 25x (you’ll often hear that you need to “save 25x your expenses” to retire). We then multiply that by 12 to annualize it, which gets to 300. It’s a simple rule, but not so simple to deal with in real life.

You can also apply the rule to big purchases (like houses and cars) if you finance them. The loans become monthly recurring expenses that you must account for in retirement unless you pay them off beforehand (more on that in the next chapter). Consider how much you need to pay a $450/month car payment ($450 x 300 = $135,000), or a $1,200/month house payment ($1,200 x 300 = $360,000) in retirement. Wow!

But smaller recurring expenses need attention too. We’ve already seen how a small monthly membership fee can require a sizable amount of savings to sustain it in retirement.

I’m a fan of enjoying our money by spending and giving it, not just saving every penny we can get our hands on (which can turn into hoarding). But beware of recurring expenses that are discretionary. Before you sign on the dotted line, multiply the “too good to be true” monthly payment by 300, especially if you’re close to retirement, and you may think twice.

Housing Expense

Housing expenses can quickly become a disproportionately high percentage of total costs. So, keeping them in check or reducing them before retirement can be a big help to those with fewer savings. That may enable you to save more and will lead to lower housing costs in retirement.

If you’re quite a way off from retirement and aren’t saving enough, and have been thinking about a bigger house, maybe you can stay in your existing home rather than upgrading (which may increase your monthly payment and taxes, maintenance, utilities, and insurance). If you own more home than you need, consider downsizing as soon as it’s practical. A big mortgage and other expenses for space you don’t need are a constant drain on scarce resources you could use for other things, like saving and giving.

If your house is safe and comfortable, don’t borrow to improve it because you think it’s a good investment. You may not get back what you spend, and you’ll be making higher house payments, which could further inhibit your ability to save. If you must borrow, consider a home equity line of credit (HELOC). Better yet, pay cash. But remember, whether you borrow or pay cash, that’s money you could be saving for retirement.

So, think twice about putting in that Japanese Koi pond and garden in your backyard. (I guess Koi are giant goldfish, but I’m not sure.) It’s likely that the money you put into your house, even if there’s a “return” on it when you sell, won’t be anything near the compound growth you would have experienced if you had invested it. Plus, maintaining a Koi pond costs a lot more than a goldfish bowl. And by the way, if you want your goldfish to live a long, happy life, the secret is, well, cleaning the bowl of its “poop.” It contains toxins, like ammonia, that wreak havoc on the fish.

Income Matters

Those in higher-income brackets before retirement will have greater flexibility in reducing expenses in retirement. That’s particularly true if a significant portion of their pre-retirement spending is debt-related, and they can pay it off before retirement. They can also reduce discretionary spending without affecting essential needs.

Lower-income households will have less flexibility with their expenses and will need to maintain a higher percentage of pre-retirement income to support their basic expense requirements in retirement. They already pay less in income tax and have less discretionary spending. Maintaining comparable health coverage in retirement will consume a higher retirement income percentage, especially if they add Medicare supplemental plans.

Reducing Expenses Versus Earning More Income

Cutting spending has its limits, particularly for those with lower incomes. Therefore, for some, a better option will be to grow their income.

That can be done in various ways: change jobs, upgrade skills, change careers, take a second job, or start a “side gig.” However, none of these are easy. So, reduce expenses as much as practical. Then, if you need more margin to increase saving, focus on the income side of the equation. Growing your income has the same effect as reducing expenses.

Reducing Expenses in Retirement

But what if you’re already retired and have found that I < E? In that case, you’ll need to find ways to reduce expenses, especially if you’re unable to work, have already started receiving Social Security, and have no resources other than savings to tap for additional income.

It Can Be Challenging

The popular financial media often tells us that we can (or should plan to) live on 70 to 80 percent of our pre-retirement income. They say we can expect to see a 20 or 30 percent reduction that will auto-magically take place without definite action. Sure, as we saw in an earlier chapter, some pre-retirement expenses related to our work, such as payroll deductions for taxes and savings accounts, may be less or eliminated altogether. But many retirees don’t see a significant change in expenditures when they retire. Even those with a comfortable level of savings can feel squeezed at some point.

All retirees have essential expenses such as food, clothing, insurance, medical bills, taxes, utilities, housing, and transportation. You have control over some of these expenses, but you may not be able to make deep cuts in some of them.

If your expenses are too high, meaning your IRR is too low, you may need to make significant expense reductions. If you want to do so while maintaining your current lifestyle, you’ll need to make some hard decisions. That’s because most people can only make cuts in discretionary spending. Depending on how much of your retirement budget is “recreation and entertainment”—things like movies, dining out, travel, and so forth—you may or may not have much flexibility.

Consider Downsizing

Expenses for house (or rental) payments, taxes, utilities, maintenance, and insurance are hard to reduce unless you consider downsizing or relocating. This strategy, which we’ll discuss in more detail later in the book, may also apply to some who are a long way from retirement; it can help them reduce expenses to save more. Downsizing is one of the strongest levers you can pull in retirement. You can downsize to a more modest home or a lower cost-of-living area if you live in a large house or a smaller house in a high cost-of-living area. Downsizing reduces expenses in most of the categories I listed above.

If you don’t want to downsize, examine all your expenditures and see where you can reduce them. Then try to fit your lifestyle into your budget. It may not be fun, but it’ll give you a better chance of not running out of money before running out of life.

Expense Risk

Another risk every pre-retiree and retired person needs to consider is what we’ll call “expense risk.” It’s the risk that you’ll have unpredictable expenses that you’ve not planned for in your retirement budget. This risk is relatively high since, as we all know, “stuff happens” in life.

Most of the living expenses I alluded to above are relatively predictable and controllable to a degree, but some are random. You know you’ll have a grocery bill, but you have some control over where you buy your groceries and how much quality you’re willing to pay for. You can also expect an electric bill and perhaps an internet bill next month, and you can probably predict the amounts with some accuracy.

But you could also have a significant, unpredictable expense, so your actual living expenses in any given year could be much higher. When your car breaks down, or the water heater fails, or you have to go to the urgent care center for an injury, you have to deal with unplanned and unpredictable expenses. Or, your granddaughter’s goldfish meets an untimely demise (few make it more than a few years), and you have to rush out and buy her another one before she knows it’s gone. (She should have cleaned the bowl, or you should have bought her a bigger one.)

Because our living expenses have both unplanned and unpredictable aspects, our total costs are, ultimately, unknowable in an absolute sense. The best way to deal with these unforeseen expenses is to establish a “contingency” fund. Assume you’ll need to replenish it from time to time and include that in your “essentials” budget, what many call an “emergency fund.” If you don’t, you have to take it from other savings—or worse, put it on a credit card.

Speaking of credit cards, there’s another area that you may need to address that pertains to anyone who wants to reduce their expenses: debt. Servicing debt in retirement is challenging. Just refer back to the Rule of 300, and you’ll see why. Reducing your debt payments automatically reduces your expenses, so it’s an important one. I address that in the next chapter of the book.


👋 Hi, I’m Chris Cagle, the founder of Retirement Stewardship, a blog that focuses on the various aspects of retirement from a Christian stewardship perspective (1 Peter 4:10).

I write as a retiree who is dealing with the things I write about. I base most of the articles on my research and experience applying it to my situation and how it might apply to yours.

If you’re new here, check out the site introduction for an overview. You can also learn more about me.


My Books

Redeeming Retirement: A Practical Guide to Catch Up (2021)
The Minister’s Retirement (2020)
Reimagine Retirement: Planning and Living for the Glory of God (2019)