The Psychological Shift from Saving to Spending in Retirement
There's an old joke among financial advisors that part of our job is to help new retirees get comfortable taking more "SKI" Trips -- meaning, "Spend the Kids' Inheritance!"
Many seniors who have worked hard and committed to a comprehensive financial plan retire with more money than they've ever had in their lives. We want those folks to feel safe and secure about their finances as they head into their Golden Years. But we also want them to have fun, pursue their passions, and explore opportunities for growth.
To accomplish both goals -- security and enjoyment -- retirees should be aware that it can be difficult to shift from a savings mentality to an “it’s ok to spend even though I’m not receiving earned income anymore” mindset.
My team at Keen Wealth focuses our spending conversations with retirees on these four important points.
1. Recognize the "Saver's Mindset."
Our careers are often inseparable from our sense of self. It's not just the day-to-day routine and responsibility of our unique roles at our place of employment; it's what we do and how well we do it that affects how we provide for ourselves and our families. As they let go of their professional titles, retirees also have to let go of that "earner" identity.
And that can feel scary. Once those monthly paychecks stop rolling in, entrenched earners might get locked into a "saver's mindset" of protecting their nest eggs above all else. It's not that they don't want to spend, it's that they feel uncomfortable doing so. Instead of scheduling those “SKI” Trips or finally replacing an old backbreaking mattress, they let volatile markets or global events have an outsized influence on how they feel about spending. Or, they get a number stuck in their head that they need to maintain so they can "keep up with the Joneses" or keep their nest eggs from cracking.
The sad thing is that many seniors who are locked into this saver's mindset do have bucket lists and retirement goals. They tell themselves that they'll see the world or buy that summer cottage "when the time is right." And they keep on telling themselves that for years, or even decades.
2. Embrace your new financial reality.
To become more comfortable with spending in retirement, savers first need to get comfortable with the nuts and bolts of living off a fixed income. Instead of cashing a paycheck every month, you're now living off a combination of investment returns, savings, and professional and government benefits that are unique to your career, your life, and your needs.
“SKI” Trips aside, you also might be spending less monthly. No more gassing up the car twice a week for your daily commute. No more investing a percentage of your income to save for retirement because, well, you are retired! Perhaps, no more mortgage or student loan payments. And, as life slows down to your preferred pace, what you spend on travel, groceries, and entertainment might decline as well.
Even if you supplement your retirement assets with income from a part-time job, you might see more money leaving your accounts every month than coming in. And, again, that can feel scary. Or irresponsible. You might even feel a little guilty.
But you shouldn't! You've worked and saved and invested your entire life to reach this point! You aren't "hurting" your nest egg by spending it -- you're using it to fulfill your vision of a dream retirement.
One big benefit of working with an advisor is that you can often see, in black and white, how your comprehensive financial plan provides for today without sacrificing tomorrow, even on a fixed income. While it's impossible to predict with 100% accuracy what surprises -- good and bad -- are coming in retirement, a good advisor can show you projections, contingency plans, and potential adjustments.
What all that planning ideally adds up to is flexibility. If you decide to schedule a luxury vacation for your 30th anniversary next year, there should be levers to pull in your comprehensive financial plan to help you reach that goal. Or, if you have a sudden health problem that goes above and beyond what Medicare covers, your comprehensive financial plan should be prepared to get you the care you need.
3. Build a spenddown strategy.
Savers and spenders alike should prepare for their retirement transition by reviewing and revising their monthly budgets and balance sheets (assets vs. outstanding debts). You'll probably find expenses that you can eliminate (excess streaming subscriptions, second or third cars), as well as some new items you'll have to add (monthly Medicare premiums).
From there, The 4% Rule can give you a very, very general idea of how much you can spend from your retirement accounts every month and every year. But if you get too fixated on a number, you might end up sacrificing some of the financial flexibility that can be important to long-term success in retirement.
So much of the planning and execution of a retirement spenddown strategy depends on a person's individual goals and needs. For example, my Keen Wealth team might sit down with a healthy and vigorous new retiree and outline a three-stage spending plan: spend more early in retirement when you're healthy enough to tackle your bucket list, scale that spending back a bit in the middle of retirement as you begin to slow down, and then focus asset allocations on care and comfort in your later years.
However, you can probably imagine scenarios where that spending plan gets flipped on its head. Maybe the retiree is healthy, but her spouse has a bad fall that requires lengthy rehabilitation. Or, perhaps this person was forced into retirement ahead of schedule and needs to withdraw more from their nest egg now to cushion the blow.
On the other hand, with more and more seniors projected to live to 100, your Go-Go years might last longer than you anticipate at the beginning of retirement!
4. Find joy in spending.
A well-designed comprehensive financial plan goes beyond your numbers to provide a spending strategy for your whole life. With that plan in place, you might start feeling more comfortable about spending. Instead of obsessively monitoring your assets, minute-by-minute, to make sure you're not overspending, you'll feel confident about your monthly budget, your withdrawal strategy, and how the money that's still in your nest egg is working for you.
And with that peace of mind, you might even start to enjoy spending money. When you've opened yourself up to what your money can really provide you and your loved ones, a whole new range of experiences and connections are suddenly available to you.
Retirees who are stuck in savings mode might want to experiment with spending their money to overcome their fears and find uses for their money that bring them the most joy. If a “SKI” Trip feels too daunting at first, start small. Take your spouse out to a fancier restaurant. The next time you're visiting your grandkids for the weekend, get a nice hotel room instead of cramming into a guest bedroom. Make a donation to a cause that matters to you. Buy your produce at a farmer's market instead of a grocery store.
Some of these purchases might make you happy. Some might not. But, as long as you're sticking to your financial plan, none of them will break the bank. Maybe next month you'll have two fancy dinners! Little by little, these experiments could lead you to healthier spending habits.
Do you or your spouse need some help shifting out of “savings mode”? Schedule an appointment at Keen Wealth Advisors and let’s work together on clearing the obstacles between you and a more fulfilling retirement.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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