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How to Cut Expenses in Retirement

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How much will you need to live on in retirement? You'll often hear the big financial services companies offer this rule of thumb: Plan to replace 80 percent of your working income in retirement.

Ellen Wagner tossed the rule of thumb out the window when she retired in 2008. Instead, she developed a plan to live well on less than half of what she had been making. Executing that plan helped allow Wagner, who's been widowed since 2008, to retire at age 58.

Wagner's story underscores an important point about retirement planning: Income and assets are just one set of values in the retirement security equation; on the other side sit lifestyle and spending. There's a growing focus on this side of the equation, thanks to writers like Chris Farrell, a journalist and author of The New Frugality (Bloomsbury Press, 2009) and retirement educator Steve Vernon, who blogs about retirement spending and expenses frequently at CBS Moneywatch.

Farrell makes the case for a new frugality based on values that are good for pocketbooks and for the environment at the same time. The core of his argument is that a conservative approach to consumerism leads to green decision-making, such as downsizing your home, using energy-efficient appliances, recycling and using public transportation instead of cars. And from a pocketbook perspective, Farrell's frugality doesn't mean pinching pennies; instead, it means spending on quality -- buying the best you can afford but no more than you need.

Vernon has pointed out other creative ways to slash spending. "[Live] like you did in your college years. Take in a roommate or two. Maybe beg your kids to move back in with you in order to share expenses," he says. "Grow your own food. Entertain yourself and your friends by renting DVDs and sharing a $5-dollar bottle of wine from your local discount retailer. Many of my contemporaries have fond memories of their college years, partly due to the shared bond of figuring out how to enjoy life on a shoestring. Is it time to go back to the future?"

Ellen Wagner thinks so. After a first career as a professional violinist in the New Orleans Symphony, she later completed a Ph.D. in philosophy and taught at the University of North Florida in Jacksonville until 2008, when she decided to make a major change in her life.

"My husband was killed in an accident in 2004. I decided to sell our house in Jacksonville, and move back to Boulder, where I'd met my husband when I was in grad school. Selling the house in Jacksonville in which we'd lived was hard but really made all the difference in my retirement."

Here are the key areas where Wager cut spending:

Downsized real estate: Wagner sold a 2,000-square-foot house in Jacksonville and bought--for cash--a condo half that size in Boulder.

"Jacksonville is actually a much less expensive place to live than Boulder, but my condo costs so much less to maintain that my life here is cheaper," she says. "I dropped the mortgage payment, alarm company, lawn care, termite spray, bug spray, and pesticide/herbicide spray fees plus costs of fixing the roof, maintaining the irrigation system, paying for water for the lawn and shrubs, and higher utilities costs.

"My homeowners' assessment in the condo is less than I used to pay monthly to have the lawn mowed! And my southwestern exposure provides passive solar heating all winter, when my furnace does not generally get a lot of use. Downsizing drastically in what I own has reduced stuff and clutter to just the right amount. This was the largest cutback in living costs."

Simplicity at home: Wagner stopped worrying about having all the latest and greatest in her home. "I stopped wanting to have newer, upgraded appliances, devices, etc. In the Jacksonville house, I had nice 42-inch cabinets and put in new countertops with an integrated sink and a designer faucet. These were good investments, as the upgrades helped me sell the house before the market had tanked completely. Here in Boulder, I have a 1985 kitchen, complete with Formica countertops and laminate cabinets with the oak strips on the bottom."

Simplicity in diet. "I stopped eating out very often and also doing much shopping. Instead, I cook at home, which I absolutely love to do, and entertain friends here with excellent food and reasonable wines. Also, I use our great public library for books I want to read, as well as the place to donate books I no longer want."

Less driving. "Now that I'm retired and living in a walk-able city with great public transportation I am putting half the miles on my car each year, which saves gas and wear-and-tear. And car insurance is cheaper now since I drive less."

Along with extending her retirement income, Wagner feels good about the new lifestyle values in her retirement equation.

"The general result is that now I can honor my ethical principles," she comments. "I use less, buy fewer new things, and tread more lightly on the planet in general. Ultimately, my life feels very luxurious because getting rid of the meaningless extra stuff has enabled me to choose what matters most to me and what I most enjoy from day to day."