Many retirees are concerned that they may outlive their savings, making it hard for them to spend money during retirement. Can you blame them for being scared to spend? Much of the financial world is focused on how woefully unprepared most Americans are for retirement. There’s also much focus placed on a 3%, 4%, or 5% “safe” withdrawal rate. This is intended to ensure that retirees depart this world with the same amount of money they accumulated for retirement. It’s no surprise that they’re afraid.
However, there is another force at work here that is not related to numbers or percentages. The power of disempowerment, specifically, is the source of severe fear for many newly retired Americans. According to research*, people who spend more in retirement are often happier, despite the fact that older Americans usually underspend. The idea of living for to 95 or even 100 years old motivates many people to be frugal. Retirees are afraid to squander their hard-earned money when they have so many years of expenses to pay.
How Many Retirees Are Scared to Spend?
It is referred to by researchers 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 annually. This is according to a study* that used data from a long-term survey of about 20,000 persons over the age of 50. This is much lower 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, wealthier retirees are even more scared to spend in retirement. Those in the top 20% of the wealth distribution could comfortably spend an additional $773,000 to $1.165 million over a 30-year retirement. This depends on how their money is invested, with 40% set aside for emergencies or bequests. However, fear is causing them to miss out. While longevity planning is critical, it is also important to enjoy your retirement. Retirement is the stage of life when many people have the time, money, and wisdom to enjoy their lives to the fullest.
Overcoming the Fear
After years of contributing to retirement funds, it can be challenging to shift 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 very carefully. A frequent strategy* is to rely heavily on Social Security, pension, and investment income. Meanwhile, withdraw very little from IRA or 401(k) retirement plan accounts until the age of 73. At age 73, the government forces traditional account holders to take required minimum distributions (RMDs) and pay related taxes.
Saving is frequently regarded as a virtue, whereas spending may be viewed by many as reckless behavior. Many people may struggle to reconcile spending money on things like first-class flights or an expensive watch. Purchases like that, after all, may contradict their self-image as a frugal person.
People who struggle to spend more have excellent self-control. This is why they typically end up with more money than they expected. Breaking this behavior once you retire is challenging. To objectively assess our finances, we must first be able to remove ourselves from our habits and emotions. Contacting a financial professional may be able to help you in this regard.
Consider Phasing Into Retirement
There is strong evidence to suggest phasing into retirement is beneficial to one’s mental, physical, and financial well-being. Financially speaking, the benefits are considerable. Physically, you’re going to remain active for longer than you otherwise might. Mentally, your identity transition becomes a journey rather than a cliff plunge. Perhaps you can postpone claiming Social Security retirement benefits for a little longer, enhancing what is likely to be one of your sole sources of fixed income (thanks to Social Security benefits increasing the longer you wait to begin taking them, capping at age 70).
Create a Portfolio Designed For Retirement
Your retirement portfolio meets a variety of personal demands. Most people, however, approach this chapter of their life using a single, fairly limiting financial strategy. It’s one of the reasons why some people struggle to stick to typical portfolio ratios like 60/40, 50/50, and so on. It may not be directly related to their actual retirement plan. As a result of this unique portfolio approach, retirees are usually advised to adhere to a single number: a statistically tested proportion of their portfolio that would (hopefully) maintain their assets during retirement.
The recommended percentage is 4%. That is, 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 finances allows you to address more of your goals, needs, and wants at this stage of your life. This can be accomplished by aiming to meet the following objectives:
- Set up an “emergency” fund within your retirement budget to guarantee you’re ready for the unexpected.
- Create a “retirement paycheck” for yourself using more stable assets to hedge against the stock market’s short-term volatility.
- Continue to grow your savings to fund your future and outpace inflation.
- Give strategically to the people and causes that are most important to you.
Conclusion
In our time helping retirees and pre-retirees, both individuals and families, financially plan for retirement, we’ve discovered that the early years of retirement can be some of the most stressful years one can endure in their whole life. But they don’t have to be. Retirement can and should be a fulfilling and purposeful time in your life, not something to be scared of. Reach out to us; we’re always here to help.
*Source: Forbes, the Wall Street Journal
