Knowing some of the common sentiments those who move from saving to spending in retirement face can help pre-retirees prepare emotionally and financially for this significant transition.
After a lifetime of saving and investing for retirement, finally doing it should feel like crossing the finish line. Instead, it turns out that shifting from a savings mentality during your work life to a smart spending strategy after retirement is a high hurdle all its own.
Ironically, those who have saved the most diligently may have the most difficult transition toward relying on retirement savings. And retiring during record-setting inflation and market volatility won’t make the newly retired sleep any easier.
Emotionally planning for retirement, and having realistic expectations, should fit hand-in-glove with financially planning for retirement. Here are some top tips to help you navigate this milestone moment.
The Great Resignation? More Like the Great Retirement
Much has been made of the historic number of employees who resigned and moved to new jobs during the pandemic, spurred by the rise of work-from-home options in the aftermath of COVID-19 shutdowns.
But a large part of the labor shortages was actually people who decided to leave the workforce altogether. The Federal Reserve Bank of St. Louis estimates that more than half of the 5 million Americans who left were retiring.1 And despite the recent market volatility, if you retired in recent years, you benefited from the longest bull market on record,2 with an 11-year run that ended in the early days of March 2020 COVID lockdowns.
Still, if you recently retired or hope to in the next five years, rising inflation and market volatility may have you thinking twice about your plans.
It’s tough to flip the switch to spending, especially after you have been diligently investing for many years. And when markets are experiencing downturns, it can make it even tougher to want to spend the nest egg. But also remember that world chaos doesn’t end when you retire—it’s always going to be a fact of life.
Here’s a Good Way to Start: Replicate Your Paycheck
A way to prepare for transitioning to your retirement savings is to create a plan that gives a monthly distribution, similar to how you receive paychecks while working—so you are still “getting paid” and hopefully tracking income and expenses with a retirement budget.
One way to do this is with an automatic withdrawal plan, where you have money from your retirement savings or investing account deposited to your bank account every month. For people used to getting a paycheck, it’s a frame of reference you know, enabling you to budget toward that number. If you don’t spend it all, great. The regular deposit may give you more freedom to actually spend your money on the things you want with less guilt.
If you’ve been a contract worker or are used to receiving lump-sum payments as compensation (such as a real-estate sale commission), you may want to set up a yearly or quarterly withdrawal to match how you’re used to getting paid.
This method is an example of a precommitment strategy, setting and then forgetting automatic actions on your account, which takes the emotion out of financial decision-making.
Regardless of how you take the withdrawal (monthly or lump sum), start the automatic withdrawal before you retire so you can see how it works—and how it feels.
Are You Depriving Yourself of Anything?
Along with a strategic plan for spending your retirement savings, you also need a plan for how you will spend your time. It can be a stark reality for some retirees when they move from a job with a two-week vacation to essentially a 52-week vacation.
Take time with your significant other or family—and your advisor—to think about what you really want to do—and may have thought you couldn’t afford. Consider taking retirement for a test drive by shifting to part-time work or consulting.
Run some spending projections to see if they are sustainable. It can give you more confidence to actually follow through if you know you aren’t likely to run out of money. You’ll also want to review the numbers against your plan periodically to help you stay confident with your spending.
Key Questions to Help Emotionally Prepare to Spend Your Savings
Q: Am I depriving myself of something I want to do? Your answer may be the very thing you begin to plan for after you quit working.
Q: What’s my non-financial goal for the year? Setting this goal can help you put a plan into action one step at a time, so you don’t feel overwhelmed.
Q: Does my spending reflect my priorities? If they don’t match up, plan each year so they can.
What’s Your (Non-financial) Goal for This Year?
You have the time in retirement to pursue interests you couldn’t get to before. What experiences are on your goals list? Spending more time with family? Traveling? Learning a new skill?
If you’re running short on ideas, talk to others—find out what others are doing in retirement that may interest you, or ask your advisor what other clients are doing. As part of “A Framework for Making Better Decisions,” Harvard professor Cass Sunstein calls this concept the “wisdom of crowds.”
Does Your Spending Fit Your Priorities?
To help you confirm you’re spending your money on the things that matter most to you, list your priorities. Is your money going toward them?
Pick the top five things you are thinking about when it comes to retirement, be it financial or how to spend time. Then focus on (or talk to your advisor about) your top two. Next time, do the same thing so you’re always planning for the following year.
A sample list of your priorities could include:
Spend more time with family
Volunteer for a non-profit
Start a business
Take up a new hobby
Attend sporting events
Having a plan gives you the confidence to transition from saver to spender. It can also help you help others. Sharing your retirement transition planning and experiences with loved ones can help them know how to prepare for the future too and witness what a healthy retirement can look like.
You Prepared for Retirement; Now Enjoy
After doing the hard work of saving for retirement, it can be an adjustment to shift to spending those savings. But with a realistic outlook on your needs, some support from those you trust and a sensible plan, you can become comfortable tapping your assets to enjoy life and love your retirement.
The Great Retirement: Who Are the Retirees?, Federal Reserve Bank of St. Louis, January 2022.
RIP to the Longest Bull Market in History (2009-2020), nazdaq.com, March 2020.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
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