Many retirees worry that they will live too long to enjoy their money. As a result, many are scared to spend in retirement. And can you blame them? Half of the financial world focuses on how woefully underprepared most Americans are for retirement. The other half focuses on a 3%, 4%, or 5% “safe” withdrawal rate—designed to ensure that retirees leave this world with as much money as they saved for retirement. It’s not surprising they’re scared.
However, there is another factor at work here that does not involve numbers or percentages. Namely, the intense anxiety that grips many newly retired Americans: the power of disempowerment.
According to studies,* those who spend more report higher levels of retirement satisfaction, despite the fact that older Americans frequently underspend. The prospect of living for 95 to even 100 years causes many people to be frugal, unwilling to spend their hard-earned money now that they have so many years of bills to pay.
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 withdrew an average of 2.1% of their savings each year. This is according to a study* based on data from a long-running survey of approximately 20,000 people over the age of 50. That is significantly lower than the 4% spending rate that many advisers 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.”*
Spending below one’s means is, surprisingly, particularly common among wealthy retirees. Those in the top 20% of the wealth distribution could safely spend an additional $773,000 to $1.165 million over a 30-year retirement. This is depending on how their money is invested, while retaining 40% of their initial wealth for emergencies or bequests. And yet, fear is leading them to miss out. While longevity planning is crucially important, it is also very important to enjoy your retirement. Retirement is the stage of life when many people have the time, money, and wisdom to live their lives to the fullest.
Overcoming the Fear
After years of contributing to retirement accounts, it can be challenging to transition to the withdrawal stage. There is so much uncertainty about how long we will live and how well the markets will perform that many people choose to spend very conservatively. A common strategy* is to support yourself primarily through Social Security, pension, and investment income. Meanwhile, withdraw very little from IRAs and 401(k)s until age 73, when the government requires those with traditional accounts to take required minimum distributions (RMDs) and pay applicable taxes.
Saving is often regarded as a virtue, whereas spending can be perceived as irresponsible behavior. Many may find it difficult to reconcile spending money on first-class airfare or a fancy watch, as it contradicts the image they have of themselves as a more frugal person.
People who have difficulty spending more have strong self-control, which is why they frequently end up wealthier than they anticipated. Breaking this habit once you enter retirement is difficult. But, we must be able to separate ourselves from our habits and emotions in order to objectively analyze our finances. Reaching out to a financial professional may be able to help with this.
Consider Phasing Into Retirement
There is a compelling case for retiring gradually for the sake of mental, physical, and financial well-being. Financially, the benefits are numerous. Physically, you stay more active for longer periods of time. Mentally, your identity shift becomes a journey rather than a cliff dive. Perhaps you can postpone taking Social Security retirement benefits a little longer, increasing what is likely the only source of fixed income for most people with an automatic inflation-adjusted increase.
Create a Portfolio Designed For Retirement
Your retirement portfolio serves a variety of personal needs. Most people, however, approach this stage of life with a single financial strategy. It’s one of the reasons why some people struggle to stick with a traditional 60/40, 50/50, etc. ratio portfolio. It may not be clearly linked to their actual retirement goals. And, as a result of this singular portfolio approach, retirees are frequently asked to adhere to a single number: a percentage of their portfolio that has been statistically tested to (hopefully) preserve their assets during retirement.
The generally recommended number is 4%. That is, if you draw only 4% of your retirement portfolio annually, you will likely “leave this earth with just as much or more than you entered retirement with.”* This is known by some 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.”*
Through a more goals-based approach to retirement finances, you can address more of your needs during this stage of life. This can be accomplished by striving to achieve the following four goals:
Protect: Create an “emergency” fund to ensure you’re prepared for the unexpected.
Live: Create a “retirement paycheck” for yourself using more stable assets to protect against the stock market’s short-term volatility.
Grow: Continue to grow your money to fund your future and outpace inflation.
Give: Give strategically to the people and causes that matter the most to you.
Conclusion
In our experience helping individuals and families into and through retirement, we’ve discovered that the early years of retirement can be some of the most stressful years one can face in their whole life. But they do not have to be. Retirement can and should be a fulfilling and purposeful period of your life, not something to be afraid of.
*Source: Forbes, the Wall Street Journal