Many retirees are anxious that they may outlive their savings. As a result, many people are reluctant to spend in retirement. Can we blame them? Half of the financial world is focused on how woefully unprepared most Americans are for retirement. The other half focuses on a 3%, 4%, or 5% “safe” withdrawal rate, which is designed to ensure that retirees leave the world with the same amount of money they accumulated for retirement. It’s not surprising that they”re scared to spend.
According to research*, persons who spend more money are often happier in retirement. Despite this, older Americans tend to underspend. The prospect of living for 95 to 100 years inspires many people to be frugal. They are afraid to waste their hard-earned money when they have so many years of diverse bills to cover.
How Many Retirees Are Scared to Spend?
Researchers refer to this as the “retirement consumption puzzle.” Married 65-year-olds with at least $100,000 in financial assets withdrew an average of 2.1% of their savings per year. This is according to a study* that analyzed data from a long-term survey of approximately 20,000 people over the age of 50. This is far lower than the 4% spending rate that many advisers advocate.*
“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, higher-income seniors are even more likely to spend less than they could. Those in the top 20% of the wealth distribution might easily spend an extra $773,000 to $1.165 million over a 30-year retirement. This varies according to how their money is invested, with 40% set aside for emergencies or bequests. However, fear is driving them to miss out. While meticulous planning is essential, you should also make the most of your retirement. Retirement is a time when many people have the time, money, and wisdom to enjoy their lives in ways they never have before.
Overcoming the Fear
After years of contributing to retirement accounts, it can be tough to transition to the withdrawal stage. Because of the uncertainty about how long we will live and how well the markets will perform, many people choose to spend carefully. One common strategy* is to rely primarily on Social Security, pension, and investment income. Meanwhile, withdraw very little from IRAs and 401(k)s until you reach the age of 73. Then, point the government requires traditional account holders to take required minimum distributions (RMDs) and pay applicable taxes.
Saving is commonly regarded as a virtue, whereas spending can be perceived as reckless. Many people may find it difficult to reconcile spending money on first-class plane tickets or an expensive gift with their self-image of being frugal and reasonable.
People who are afraid to spend more have exceptional self-control. As a result, they usually have more money saved for retirement than they expected, but don’t make good use of it, as the fear continues into retirement. Breaking this habit once you retire is difficult. To objectively evaluate our finances, we must first be able to separate ourselves from our habits and emotions. In this case, speaking with a financial professional could be advantageous.
Consider Phasing Into Retirement
There is substantial evidence that slowly phasing into retirement improves one’s mental, physical, and financial well-being. As part of your gradual transition into retirement, you could postpone claiming Social Security retirement benefits for a little longer. This improves what is likely to be most people’s sole source of fixed income. Social Security benefits increase every year that you don’t begin withdrawing them, capping at age 70.
Create a Portfolio Designed For Retirement
Your retirement portfolio must accommodate a variety of personal needs. Most people approach retirement with a single financial strategy, which may not be directly related to many of their retirement objectives. As a result of this unique portfolio method, retirees are typically recommended to stick to a single number. A statistically tested element of their portfolio that will (hopefully) preserve their assets in retirement.
The recommended percentage is 4%. So, if you withdraw only 4% of your retirement portfolio each year, you will probably “leave this earth with just as much or more than you entered retirement with.”* This is sometimes referred to 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.”*
Taking a more goal-oriented approach to retirement savings enables you to meet more of your needs at this stage of life. To accomplish this, attempt to meet the four objectives listed below:
Create an “emergency” fund to ensure you are prepared for the unexpected.
Prepare a “retirement paycheck” for yourself. Put money into more stable accounts or products to protect against the stock market’s short-term volatility.
Continue to increase your savings to fund your future while outpacing inflation.
Give strategically to the people and causes that matter most to you.
Conclusion
In our years of coaching individuals and families into and through retirement, we’ve noticed that the first few years of retirement can be among the most stressful of one’s life. However, they do not need to be. Retirement can and should be a rewarding and purposeful period in your life, not something to be scared of.
*Source: Forbes, the Wall Street Journal
