Many retirees are concerned that they may run out of savings during retirement, due to a combination of inflation and people living longer on average. As a result, many are afraid to spend during retirement. And can you blame them? Half of the financial industry focuses on how unprepared most Americans are for retirement. The other half focuses on a 3%, 4%, or 5% “safe” withdrawal rate, which is intended to ensure that retirees leave the world with as much money as they accumulated for retirement. It’s understandable that they’re afraid.
According to studies*, individuals who spend more report higher levels of satisfaction in retirement, despite the reality that many older Americans underspend. The idea of living for 95 to 100 years leads to many retirees being scared to spend their hard-earned money when they have so many expenses to pay.
How Many Retirees Are Scared to Spend?
Researchers refer to it as the “retirement consumption puzzle.” Married 65-year-olds with at least $100,000 in financial assets took out an average of 2.1% of their savings every year. This is according to a study* that used data from a long-running survey of almost 20,000 persons over the age of 50. This is much lower than many consultants’ recommended spending rate of 4%.*
“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 even more likely than others to be scared to spend. Those in the top 20% of wealth distribution might be able to afford to spend an extra $773,000 to $1.165 million during a 30-year retirement. This is dependent on how they invest their money, of course. Nonetheless, fear is leading them to miss out. While long-term preparation is critical to a successful retirement, you should also ensure you enjoy your retirement as much as possible. Retirement is the time in life when many have the time, money, and wisdom to live their lives to the fullest.
Overcoming the Fear
After years of contributing to retirement funds, transitioning to the withdrawal stage can be difficult. Many individuals opt to spend carefully since there is so much uncertainty about how long we will live and how well the markets will perform. A frequent strategy* is to rely heavily on Social Security, pensions, and investment income. Meanwhile, withdraw relatively little from IRAs and 401(k)s until you reach age 73, when the government mandates traditional account holders to take required minimum distributions (RMDs) and pay related taxes.
Saving is frequently considered a virtue, whereas spending may be perceived as reckless behavior. Many retirees may struggle to reconcile spending money on a first-class flight somewhere nice or an expensive gift since it violates their self-image as a more frugal person.
Those who are scared to spend more have excellent self-control, which is why they typically wind up with more retirement savings than expected. Breaking this behavior once they actually enter retirement, so they can enjoy it to the fullest using that money, is challenging. To assess our money honestly, we must be able to remove ourselves from our habits and emotions. A financial professional may be able to assist you with this.
Consider Phasing Into Retirement
There is convincing evidence that slowing phasing into retirement rather than stopping work all at once is beneficial to one’s emotional, physical, and financial well-being. Financially, there are various benefits. Physically, you can be more active for longer times during retirement. Mentally, your identity transformation becomes a slow journey rather than a cliff jump. Perhaps you can postpone claiming Social Security retirement benefits for a little longer, boosting what is likely to be one of the only sources of fixed income for you. Every year after retiring that you wait before collecting Social Security benefits, your benefits will be increased, capping at age 70.
Create a Portfolio Designed For Retirement
Your retirement portfolio must meet a wide range of personal needs and goals. Most people, however, enter this period of life with a single unified financial plan that may not actually be personalized to them. As a result of this single portfolio strategy, retirees are typically encouraged to stick to a single number: a statistically tested percentage of their portfolio to (hopefully) protect their assets throughout retirement.
The usual recommendation is 4%. That is, if you withdraw only 4% of your retirement portfolio each year, you would likely “leave this earth with just as much or more than you entered retirement with.”* Some 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 may meet more of your needs and reach more of your goals during this period of life by adopting a more goal-oriented approach to retirement finances. This may be done by striving for the following objectives:
Set up an “emergency” fund to guarantee that you are ready for the unexpected.
Create a “retirement paycheck” for yourself by utilizing more stable assets to hedge against the stock market’s short-term volatility.
Keep growing your wealth to support yourself in the future and keep up with inflation.
Give strategically to the people and causes that are important to you.
Conclusion
In our time guiding individuals and families into and through retirement, we’ve observed that the early years of retirement can be the most stressful years of one’s life. But they don’t have to be. Retirement could and should be a rewarding and purposeful time in your life, not something to be feared.
*Source: Forbes, the Wall Street Journal
