A Surprisingly Hard Part of Retirement: Spending What You’ve Worked So Hard To Save

You’ve been working and saving for this exact moment: retirement.

While you may be ready to quit working full time, now comes the hard part: letting you actually use your savings, since you won’t be bringing in that paycheck, which until now covered your monthly expenses.

Making the psychological shift from saver to spender – let alone money manager – is no small feat for most people.

“Now you have this lump sum and you have to withdraw it. For some, it’s almost physically painful,” said David John, senior strategic policy adviser at the AARP Public Policy Institute.

But unpredictable Factors like market performance, life expectancy and health issues make spending your money easier said than done, John said. This is why people may be hesitant to dip into their savings because they think, “I have X dollars and it will last my whole life, but I have a very uncertain future.” So if I touch this, I put myself in danger.

And research shows that among retirees with savings, many don’t draw much, choosing instead to live off fixed sources of funds, such as Social Security or pensions or income from part-time work they take. A Black Rock study found that the vast majority of retirees still have at least 80% of their savings after two decades of retirement.

That’s no doubt partly because they had one of the longest bull markets in history from 2009 to 2020, which helped replenish some of what they’ve drawn down over the years. . And they are part of the last generation of workers to benefit from company pensions.

But psychological reluctance to tap savings is a factor for most people, regardless of their financial means. And it could become more acute for future retirees as they face inflation, volatile markets and a lack of pensions, John said.

Certified Financial Planner Kyle Newell reminds his clients that the savings they’ve worked so hard to save are there to help them live well in retirement.

“I tell them, now the money does the work [so] they don’t have to. It seems to help people,” said Newell, who does screenings for her clients to help them see if they can afford to spend a little more than they think.

For clients who are determined to have the same amount of money or more when they die, CFP David Edmisten asks them a simple question: Why is this important to you?

“I try to ask them what the money is for: having it? Or use it as a tool to do what you want and avoid what you don’t? »

He also asks them to think about what they really want to accomplish and consider their savings as the means to get there. “You have to spend a lot more time thinking about the purpose of retirement. Those who know what their goal is and what they want to do report being more satisfied,” Edmisten said.

And he also advises clients to be kind to themselves and view their first year in retirement as a learning experience when it comes to spending.

They’re trying to figure out who they are now that their primary career is over and figure out what they can and can’t do financially, he said. “I had a client with millions who asked me if he could buy a used car.”

It’s hard to manage your money well in retirement unless you’re realistic about what’s on the table.

The first thing to do is to make a budget and outline a plan to cover your expenses.

“You really need to know ‘What are my assets and my spending habits and how can I balance the two? “, John said.

So, before you retire, keep track of your regular expenses and expenses like housing, food, healthcare, etc. Then assess how those expenses might change in retirement (for example, if you plan to move to a less expensive home or area; and if you’ll qualify for Medicare or if your insurance costs will be subsidized by your former employer).

Also consider anticipated one-time expenses, such as paying for a child’s wedding, buying a car, or a major vacation.

Next, estimate the fixed income you will receive (for example, social security or pension payments).

The difference between your planned expenses and your fixed income is the amount you will need to draw from your savings.

Once you have that figure, create a cash reserve that can cover what you’ll need for a year or two so you don’t have to sell anything if the market goes south or you pull out. in a bear market.

“A year before you retire, you should have 12 to 24 months of cash flow,” Edmisten said. “If we go into a recession, we should never have to sell a stock to meet spending needs when the market is down.”

It would also help to consult a professional. A paid financial fiduciary advisor can help you strategize how to manage and use your money in the years to come, John said.

Those about to retire “are often like deer in the headlights,” said Edmisten, whose clients are mostly between 58 and 63 and plan to live off their wallets for a while until social Security., and Medicare kicks in. “The sentiment I hear the most is that my clients say they’re overwhelmed with all the choices they have to make to live off their retirement savings,” a- he declared.

“With the different types of accounts many have, the potential for higher penalties and taxes if withdrawals are made incorrectly, and sorting out how their investments may need to be transferred for retirement income, this can be a lot for a new retiree to get an idea. .”

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