A prevalent source of anxiety among retirees is that they may outlive their retirement funds. As a result, many people are hesitant to squander their retirement savings. And it’s not surprising, given how poorly prepared many Americans are for retirement. You’ll regularly hear people in the financial services industry say exactly that. The average person being afraid is unsurprising. But, hopefully, we can help.
Although older Americans tend to underspend, research shows that those who spend more have higher levels of retirement satisfaction. However, with so many years of expenses to pay, many people are very rugal and hesitant to spend their hard-earned money. Especially considering inflation and the possibility of living to be 95 or even 100 years old.
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 made an average annual withdrawal of 2.1% of their savings. This is the conclusion of a study* that analyzed data from a long-term survey of nearly 20,000 adults over the age of 50. This is significantly 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, wealthy retirees are even more likely to spend less than they could afford to. Over the course of a 30-year retirement, those in the top 20% of the wealth distribution could reasonably spend an additional $773,000 to $1.165 million. Depending on their investment strategy, they may save 40% of their initial wealth for bequests or emergencies. However, they’re all missing out because they’re scared. Planning ahead carefully is vitally important, but so is enjoying your retirement. For many people, retirement is when they will have the time, resources, and wisdom to enjoy life to the fullest.
Overcoming the Fear
Making the transition to the withdrawal stage after years of retirement account contributions may be challenging. Many people are scared to spend because of the uncertainty surrounding how long we will live and how well the markets will perform. One popular strategy* is to rely primarily on investment income, pensions, and Social Security to support yourself. Waiting until the age of 73, when the government requires individuals with traditional retirement plan accounts to take required minimum distributions (RMDs) and pay associated taxes, before withdrawing funds from those accounts, such as IRAs and 401(k).
Spending can be seen as reckless behavior, whereas saving is frequently regarded as a virtue. Many people may struggle to justify spending money on an expensive gift or a first-class flight because it contradicts their perception of themselves as being more frugal. Many people who are scared of spending have a high level of self-control. As a result, they may find that they have saved even more for retirement than they expected. It’s difficult to change habits like that, which you’ve kept for most of your adult life, once you’re finally retired. But in order to examine our money objectively, we must be able to separate ourselves from our habits and emotions. Speaking with a financial professional may be beneficial in this situation.
Consider Phasing Into Retirement
There is a compelling case for retiring gradually in order to protect one’s financial, physical, and mental health. There are many financial benefits. You may also stay physically active for extended periods of time this way. Mentally, the change of identity that may come with retirement becomes a slow journey rather than a sudden transition. You may be able to postpone receiving Social Security retirement payments for a short period of time, resulting in an automatic inflation-adjusted increase to what is likely to be one of your only fixed income streams.
Create a Portfolio Designed For Retirement
Your retirement portfolio can be put to many different personal uses. However, by this age, the majority of people have only one financial strategy in place, which may not even be properly tailor-made to them. This makes it difficult for some people to maintain a standard 60/40, 50/50, or other ratio portfolio. Furthermore, because of this single portfolio approach, retirees are frequently advised to stick to a single figure: a statistically tested percentage of their portfolio that will (hopefully) protect their assets in retirement.
Four percent is typically recommended. In other words, 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”*. Some people call this “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 can meet more of your needs at this stage of life by approaching retirement savings with a more goal-oriented mindset. This can be achieved by working toward the following objectives:
Create an “emergency” fund to ensure you are prepared for anything.
To protect yourself from the stock market’s short-term volatility, create a “retirement paycheck” for yourself using more stable assets.
To finance your future and hopefully outpace inflation, try to continue growing your wealth during retirement.
Make thoughtful contributions to the causes and people that matter most to you.
Conclusion
Based on our knowledge in guiding people and families into and through retirement, we’ve found that the first few years of retirement can be among the most trying times in a person’s life. They don’t have to be, though. Retirement should not be something to be feared; rather, it can and should be a time of purpose and fulfillment in your life. Reach out to us to learn more.
*Source: Forbes, the Wall Street Journal