Retirement is All About Spending, And Experts Say You Aren’t Spending Enough
If you are nearing or are already in retirement, you are about to change from being an earner and a saver to being a spender. You spent a lifetime amassing savings and other resources and now is the time to use these assets – assuming you can accurately figure out how much to spend in retirement.
As you contemplate your budget, you might also want to take a look at how much you spend in retirement (and plan to spend) and make sure that your spending levels are in line with your retirement goals and assets.
Research says that many of you could be spending more each year. (Maybe it is time to dust off your passport or buy that boat.)
How Much to Spend in Retirement – Are You Too Frugal or Too Frivolous?
While frugality in retirement is admirable, some experts say that many retirees simply aren’t spending quite enough.
Signs that indicate you are spending too little:
- If you are underinsured or are skipping on medical care because you are worried about costs.
- While not the best rule of thumb, if you are withdrawing less than 4% from your retirement savings, then you could probably spend more – especially if you are already well into retirement.
- You could be and would like to be spending more but are conserving your savings.
- You are not allowing your withdrawal rate to keep pace with inflation.
- You are on track to end up with more money at the end of your life than you have now and have met or exceeded your goals for leaving an inheritance.
Conserving your money is understandable. It can be terrifying to face the prospect of running out, but the data suggests that retirees are actually staying quite solvent.
Spending Too Little in Retirement Is Common
In a recent study published in the Journal of Financial Planning, researchers found that retirees in the top quintile of financial wealth were spending nowhere near an amount that would place them in danger of running out of money. In fact, the average financial assets of wealthy retirees increased during this period.
Beyond the wealthiest, the study also found that retirees in the third and fourth quintiles also spent less than their income.
According to the report, “the average total income of respondents in the third, fourth, and fifth quintiles was greater than average total consumption. Without any consideration to the drawdown of financial assets, the consumption of these groups could have been increased simply by spending all available income.” In short, that means most people are living too well withing their means. They are continuing to save when they should be drawing down savings.
And, related research has found that many pre-retirees also save too much for retirement.
How Can You Be Sure You Are Not Going to Run Out of Money?
In retirement, you need spending to strike a tenuous balance between:
- Spending without fear or stress
- Investing and growing your assets to keep pace with inflation
- Stretching your assets to last over an undetermined amount of time
- Protecting those assets (and your desired spending levels) from unforeseen events in the financial markets.
It may sound like a tall order, but there are a few tips for getting a more realistic picture of how much to spend in retirement.
1. Create a Detailed Budget
The more you know about how much you are going to spend and how those expenses will change over time, the better you will know how much you can withdraw at any given time during retirement. Here are 9 Tips for Predicting Retirement Expenses.
2. Know Your Retirement Income Sources
Most retirees collect Social Security and make withdrawals from savings. Some retirees get pensions, earn work income, or have passive income sources. You need to know exactly how these income sources will ebb and flow over your (and your spouse’s) lifetime.
The NewRetirement retirement planning calculator can help you see your different income sources and how they change over time.
3. Identify a Withdrawal Strategy
There are many different approaches to tapping your savings for retirement. The trick is choosing one that really makes sense for you. Here are a few articles on the subject:
- 5 Steps to a Retirement Drawdown Strategy
- No Retirement Withdrawal Strategy is Perfect, Particularly the 4% One
- 10 Expert Retirement Income Strategies
4. Have a Dedicated Fund for Medical and Longevity-Related Expenses
Instead of worrying about whether your money will be there near the end of your life or if you’ll have enough for a major medical crisis, simply budget these items separately.
- You could have a specific bucket of savings for these unknowable expenses
- Another strategy is to invest in a deferred lifetime annuity to kick in at a predetermined point in your future
5. Understand Your Housing Wealth
Many retirees overlook their biggest source of wealth – their home. It is actually one of the most misunderstood aspects of the calculations in the NewRetirement retirement planning calculator.
Many retirees ask us about why they are forecast to have so much money left at the ends of their lives. The reason is home equity. Many retirees hope to leave this equity to their heirs, but others want to tap into it to use on retirement expenses.
Your home equity and when or if you want to use it can be a huge swing in whether or not you are spending too much or too little in retirement. The NewRetirement retirement planning calculator does enable you to model different options like downsizing, refinancing, getting a reverse mortgage, and more.
6. Set Legacy Goals
Know how much you want to leave to heirs and allow for a little wiggle room.
7. Plan for You, Your Spouse, and Any Other Dependents
Making sure that you won’t run out of money is not quite enough. You also need to consider your spouse and any other dependents.
A Financial Advisor Can Offer Peace of Mind
While retirement planning tools like the NewRetirement retirement planning calculator are making it pretty easy for almost anyone to create and maintain a sophisticated and detailed plan, many people appreciate the peace of mind that working with a professional financial advisor can offer.
With so much complexity and angst around knowing how much you can safely spend given the huge range of variables that can impact that number, a good fiduciary financial advisor can steer you in the right direction and take a lot of the guesswork out of the equation. And, you can still check many of the advisor’s recommendations by running what if scenarios in a detailed online calculator. (Click here if you would like NewRetirement to match you to a prescreened advisor offering a free consultation and services for a flat fee.)