How to Retire on a Shoestring

You often have to be a little frugal to make a retirement budget work. The $27,798 median income for American households headed by someone 65 or older doesn't offer much breathing room when gas, groceries, and out-of-pocket healthcare costs all are conspiring to make retirement more difficult.

The typical Social Security recipient gets only $1,050 a month before the Medicare premium is deducted—and Social Security is the largest source of income for most retirees. Here are some ways to adjust your retirement lifestyle to stay on budget.

Work an extra year. The biggest retirement decision is when you retire. Between the ages of 62 and 70, "working one more year typically raises annual income 8 to 9 percent," says Eugene Steuerle, a senior fellow at the Urban Institute. That's because delayed claiming of Social Security allows you to get higher monthly payments, your retirement accounts have an extra year to grow, you're reducing the number of years your savings must last, and perhaps you can even tuck away a little bit more money.

It also helps if you can retire at a time when your investments are doing well. "If you retire in a down market, you use up more of your financial assets than you do if you retire in a healthy market," says James Hotvet, a certified financial planner in Pasadena, Calif. "If you've got an option to delay retirement, it's probably not a bad idea to do it right now."

Spend taxable dollars first. You can begin withdrawing money from your IRA or 401(k) penalty free at age 59 ½, but that doesn't mean you should. You'll generally want to draw down taxable accounts before tapping tax-advantaged assets. "If you have a 401(k) or IRA, you will want to dip into those funds only as a last resort, because, left untouched, the earnings on these amounts continue to accumulate on a tax-deferred basis," says Mark Iwry, a Brookings Institution senior fellow and principal of the Retirement Security Project. Beginning at age 70 ½, everyone with a traditional IRA or 401(k), unless continuing to work, must take what is known as an annual required minimum distribution or face a hefty penalty. These distributions are taxed as income (except for Roth IRAs or Roth 401(k)'s, where taxes have already been paid on contributions), so you may want to withdraw above the minimum in years when you are in a lower tax bracket.

Slash transportation costs. The typical senior between the ages of 65 and 74 spends $7,481 annually on transportation costs, according to the Labor Department's most recent Consumer Expenditure Survey. But this is one of the easiest areas in which to slash costs. Many retirees report driving less (56 percent), and a few report taking public transportation (5 percent) and carpooling more often (3 percent), a Principal Financial Group survey conducted by Harris Interactive found.

Downsizing from two cars to one or to a less flashy model can slash insurance premiums. Car maintenance, such as properly inflated tires, tuneups, oil changes, and a new air filter, can decrease fuel costs. Claudette Price, a 67-year-old retiree in Madison, Ill., likes to consolidate all her errands into a single trip to save on fuel. Walking and biking are also great ways to get exercise on the go.

Even sensible driving—for instance, decreasing your speed, avoiding idling, turning down the air conditioning, and using cruise control on the highway—can help you save up to $115 per year on gasoline costs, according to the nonprofit Alliance to Save Energy. Jane Kilbea, 62, of Highland, Ill., is convinced that driving slower to work each day and reducing speed for yellow lights instead of racing though them allow her to use about 2 ½ fewer gallons per fill-up, a savings of more than $8, she estimates. "It seems to calm me, too," Kilbea says of her new driving strategy. "But it seems to make other people a little angry because I go a little slower."