A common concern among retirees is that they will outlive their retirement savings. Many people are therefore scared to spend money in retirement. And it’s no surprise, consider how woefully unprepared many Americans are for retirement. You’ll often hear the financial services industry tell you just that. Their fear is unsurprising.
Despite the fact that older Americans tend to underspend, research indicates that individuals who spend more have better levels of retirement satisfaction. But, since they have so many years’ worth of bills to pay, many people are frugal and reluctant to spend their hard-earned money. Especially due to inflation, and since they could potentially live to be 95 or even 100 years old.
How Many Retirees Are Scared to Spend?
People who study it call it the “retirement consumption puzzle.” The average annual withdrawal for married 65-year-olds with at least $100,000 in financial assets was 2.1% of their savings. This is the conclusion of a study* that used information from a long-running survey of almost 20,000 adults over 50. This is much less than the 4% spending rate that many advisors recommend.*
“The goal is to ensure nest eggs last 30 years in the worst of times, which means they last even longer in better markets.”*
Surprisingly, wealthy retirees are especially likely to spend less than they could potentially afford. Over the course of a 30-year retirement, those in the top 20% of the wealth distribution may reasonably spend an extra $773,000 to $1.165 million. Depending on their investment strategy, they may keep 40% of their original wealth for bequests or emergencies. But they’re missing out because they’re afraid. Planning for longevity is vital, but it’s also important to enjoy your retirement. For many, retirement is when they have the time, resources, and maturity to fully enjoy life.
Overcoming the Fear
Making the move to the withdrawal stage after years of retirement account contributions might be difficult. Many people are scared to spend because there is so much uncertainty about how long we will live and how well the markets will perform. One popular tactic* is to rely mostly on investment income, pensions, and Social Security to support oneself. Waiting until the age of 73, when the government mandates that individuals with traditional retirement plan accounts take required minimum distributions (RMDs) and pay related taxes, to finally withdrawals from those accounts–such as IRAs and 401(k)s.
Spending might be seen as reckless behavior, and saving is frequently seen as a virtue. Spending money on an expensive gift or first-class flight may be hard for many people to justify since it goes against their perception of themselves as more frugal. Many who are scared to spend are the type of people with very strong self-control. As a result, they might find themselves with even more than they expected to have saved for retirement. Once you’re retired, it’s hard to break this behavior. But in order to examine our money objectively, we need to be able to disentangle ourselves from our routines and feelings. Speaking with a financial expert could be beneficial in this regard.
Consider Phasing Into Retirement
For the sake of one’s financial, physical, and mental health, there is a strong argument for retiring gradually. There are several financial advantages. You remain physically active for extended periods of time. Mentally, changing who you are becomes a journey instead of a sudden change. You might be able to delay receiving Social Security retirement payments for a little while longer, which would add an automatic inflation-adjusted increase to what is probably one of the only sources of fixed income you’ll have.
Create a Portfolio Designed For Retirement
There are several personal uses for your retirement portfolio. However, the majority of people only use one financial strategy when they reach this period of life. Some people find it difficult to maintain a standard 60/40, 50/50, etc. ratio portfolio because of this. It could not be directly related to their real retirement objectives. Additionally, because of this one portfolio approach, retirees are often advised to stick to a single figure: a percentage of their portfolio that has been statistically tested to (hopefully) protect their assets in retirement.
Four percent is the amount that is typically advised. In other words, you will probably “leave this earth with just as much or more than you entered retirement with” if you take out only 4% of your retirement portfolio each year.* Some people refer to this as “The 96% Problem.”*
“The stark reality of the 96% problem isn’t just about unused wealth, it’s about unlived lives. It’s about the moments we didn’t seize, the hands we didn’t hold, the places we didn’t go, and the changes we didn’t make.”*
You can meet more of your demands at this stage of life by approaching retirement money with a more goal-based approach. This can be achieved by working toward the objectives listed below:
Establish an “emergency” fund to make sure you’re ready for anything.
To guard against the short-term volatility of the stock market, create a “retirement paycheck” for yourself using more reliable assets.
To finance your future and beat inflation, continue to grow your wealth during retirement if possible.
Make thoughtful contributions to the causes and people that are most important to you.
Conclusion
Based on our knowledge in guiding people and families into and through retirement, we’ve found that the first few years of retirement can be among the most trying times in a person’s life. They don’t have to be, though. Retirement is not something to be feared; rather, it can and should be a time of purpose and fulfillment in your life. Reach out to us to learn more.
*Source: Forbes, the Wall Street Journal
