By Peter Mastrantuono
One of the least discussed adjustments when transitioning to retirement is the individual journey from being a saver to becoming a spender.
Retirement present a unique and consequential challenge to all Americans: How to make their savings last for the rest of their lives in the face of profound uncertainties, e.g., how long they will live, what the inflation rate will be, their future health and what investment returns they will earn.
This is one reason why it’s such a difficult task to move from a saver to a spender in retirement. These unknowns can create substantial anxiety and stress, causing many retirees to worry about spending too much and what the impact of portfolio losses will have on their ability to meet future expenses.
Overcoming Emotional Reins to Spending in Retirement
The emotional relationship individuals have with money and wealth is varied and complex. It is no easy thing to overcome the money values instilled from childhood or the years-long savings habit that preceded the decision to retire.
There are, however, a number of practical steps that retirees or near-retirees can take that will help them grow more comfortable with becoming a spender in retirement and ultimately allow them to enjoy their retirement years with less anxiety and guilt.
- Understand Future Expenses: Most retirees underestimate the level of expenses they may face in their retirement years, usually overlooking important expenses, such as taxes, long-term care and important family events, like marriage, grandchildren, etc.
To get a more realistic idea of future expenses, consider working with a financial advisor who works with other, older retirees and has practical insights into their real-world experiences.
- Make a Budget: Your retirement savings are like a paycheck you receive that needs to last for the next 25 years or more. That means you need a budget that brings some discipline and guardrails around your spending.
Don’t worry if your spending is elevated in those first few years. That’s typical of retirees as they act on long-held retirement dreams while their health is still good. Spending will usually decline in mid and late retirement as activity slows, though it is important to begin reflecting greater healthcare-related expenses.
- Calculate When to Begin Social Security: Most retirees begin taking Social Security at age 62 even though it involves a significantly reduced benefit for the entire length of a multiple-decade retirement.
Your financial advisor may be able to find a way to bridge your income to full retirement age in order to receive your full Social Security income benefit, allowing you to enjoy greater financial security in the long run.
- Maintain a Cash Cushion: Having one to two years of expenses in cash reduces the likelihood of needing to sell investments during a down market period. When this risk is mitigated, you are in a position to better align your investments with your long-term return needs and increase the probability that your savings will last through your entire retirement.
Anxiety is a natural result of uncertainty. Nevertheless, undue worries can lead to suboptimal investment decisions, potentially harming your retirement finances. A cloud of anxiety is also no way to travel through retirement.
Working with a financial advisor to reduce financial uncertainties can go a long way in making for a much more enjoyable retirement.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.