How to Retire on Less Than $1 Million

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Everyone's retirement savings goals are different, and for you the finish line may come well before $1 million. Photo: hikingartist.com via Flickr.

$1 million is a great goal for your retirement savings. Indeed, if you were to retire now with a $1 million nest egg and typical Social Security benefits, your lifestyle would be roughly in line with that of a typical working family. The problem is, though, that it typically takes decades of dedication to amass a $1 million nest egg, and if you don't start early enough, it becomes much more difficult to get there.

Fortunately, it's very likely you don't need $1 million to retire. If you're retiring on less, you do face tougher decisions and more trade-offs, but you can certainly still live fairly comfortably on a smaller nest egg if you plan for it well. There are three key tactics you can follow to help you cover your costs with fewer assets.

Tactic No. 1: Keep your costs down
Once you retire, several work-related costs go away, including work-related taxes like Social Security and Medicare, work clothes, commuting costs, and work-related social events.Likewise, if your kids are grown and independent and your house is paid off, then that will take two big expenses off your hands.

Further, you'll likely find you have more time for money-saving do-it-yourself activities like making repairs to your home instead of hiring a contractor. Small projects like caulking gaps aroundyour windows can save you heating and cooling costs. Slightly larger ones, like installing water-efficient sinks, shower heads, toilets, and dishwashers, can save you both water and energy costs without impacting your lifestyle.

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With more time on your hands, you can also shop more efficiently for groceries andmake more meals from scratch, which can really cut down on your food costs. You can also take more time to get where you need to be, so instead of driving everywhere, you can opt for much more cost-effective methods of transportation, like walking or takingthe bus. As a bonus, if these changes getyou eating healthier and walking more, they'll improve your health -- which can reduce your medical costs.

Asyour costs drop off, you'll have less pressure on the income you get from Social Security and whatever you've saved up. So long as you have your health, you can live much more comfortably in retirement than a working person with a similar income. Use that to your advantage to improve both your day-to-day financial flexibility and your ability to cover big costs when they arise.

Tactic No. 2: Trade your time for money
If you're able to work, continuing to do so even after you formally retire can help you stretch your nest egg farther. The direct income can help you cover your costs today and may help increase your Social Security benefits as well. In addition, the later you wait to collect Social Security -- up until age 70-- the higher your Social Security payment will be. The Social Security Administration has more info here.

In addition, the longer you work, the less time your nest egg needs to support you in retirement. One oft-cited guideline in retirement planning is known as the 4% rule. According to that rule, if you withdraw 4% of a well-diversified nest egg in the first year of your retirement and then increase your annual withdrawals from there to account for inflation, your retirement savings are likely to last throughout your retirement.

The 4% Rule presumes a 30-year retirement -- such as from age 65 to age 95. The longer you work, the fewer years in retirement your nest egg will need to cover, and the larger a portion you can take out of your nest egg. For instance, if you only have a 15-year time horizon in retirement, the amount you can withdraw that first year is closer to 6%. That's around a 50% increase in what you can take from your nest egg, simply because it doesn't need to support you as long.

Tactic No. 3: Be willing to consider bigger financial risks
Over the long haul, the stock market has delivered annualized returns of about 9%-10%. Unfortunately, those returns are not guaranteed, and they're not consistent. There are long periods of time in which typical investors lose money. For retirees living off their portfolios, the prospects of market losses are especially worrisome, as the money they withdraw for living expenses can't participate in any recovery that may happen.

A retirement-friendly portfolio incorporates stocks for the long haul, bonds for the near- to mid-term future, and cash for short-term needs. Within that context, there are stocks that can be appropriate for retirees to own, particularly ones that pay decently covered dividends, have solid balance sheets, and trade at reasonable valuations for their business prospects. A trade-off retirees can makeis to take on a higher stock concentration to boost long-run return potential at the expense of cutting down their portfolio's buffer of bonds and cash.

For instance, if you're planning for a retirement portfolio with a one-year cash buffer and a seven-year bond ladder, perhaps you could consider a six-month cash buffer and a five-year bond ladder instead. That would put an additional 2-1/2 years' worth of your living expenses back in the stock market, where that money could potentially earn higher returns -- although you'd be more vulnerable to a long-term market downturn. Just be careful not to cut that cash and bond buffer so far back that a stock market slump could cost you money you may need within the next few years.

Increasing yourexposure to the market's volatility by cutting back on your bond and cashbuffer isnot an easy decision to make, but it's one of the most effective ways of making your nest egg last longer.

Is a cheaper retirement realistic?
Say you were earning about $58,000 a year before you retired --about the national average income for households headed by those in the 55-64 age range. The reality is that you don't have to replace your entire income, even if you want to maintain your pre-retirement lifestyle.

You paid 7.65% of your income to Uncle Sam for your part of theSocial Security and Medicare taxes -- which typical retirees don't pay.That knocks it down to$53,563. If, in addition, you were saving 15% of your salary for your retirement, that's another $8,700 you don't have to cover, bringing your total to $44,863. The average new retiree receives around$1,334 per month from Social Security-- or $16,008 per year --which bringsthe total you'd have to coverper year from your savings to $28,855.

Using that same 4% rule mentioned above, your nest egg at retirement would need to be around $725,000 to cover a lifestyle comparable to what you had before retiring-- still substantial, but well under $1 million. If, thanks to livingmore economicallyin retirement, you think you could be comfortableon $35,000 per year, then your nest egg would only have to cover about $19,000 per year after Social Security. That works out to a nest egg at retirement around $475,000 -- under half that initial $1 million target.

No matter what size nest egg you're targeting, remember that you don't need to save that much to wind up with that much in retirement. Your final nest egg depends on both the money you sock away and the returns that money earns while you've invested it. The sooner you get started, the easier it is for your investments to grow enough for the returns to be a big driver of what you end up with at retirement.

Retire comfortably on your terms
$1 million remains a great goal for your retirement portfolio, and it's certainly easier to retire comfortably with $1 million or more than it is with less. Still, with good planning and judicious use of some or all of those three tactics, you can retire comfortably with a smaller nest egg.

Don't stop trying for that $1 million, but realize that if you don't quite hit that mark by the time you retire, you can still figure out how to work with what you have.

The article How to Retire on Less Than $1 Million originally appeared on Fool.com.

Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.