Clearing the psychological hurdle of retirement spending

Casey Bear |

Transitioning from a “saver” during your high-income, earning years to a “spender” in retirement who relies on a fixed income from retirement savings can be a significant psychological hurdle to clear.  

Many people are so focused on accu­mulating assets during their earning years that they neglect to think about how it might feel to withdraw and then spend the money they’ve so diligently saved. In fact, research from BlackRock in conjunction with the Employee Benefit Research Institute (EBRI) shows that many retirees aren’t drawing down their retirement portfolios, opting instead to live on Social Security and the minimum required distributions (aka RMDs) so their portfolios can continue to grow. This may lead to unnecessary sacrifices in a retiree’s standard of living; in fact, the same study from BlackRock shows that after almost two decades in retirement, most cur­rent retirees still have 80% of their pre-retirement savings.

How can you help get over the psychological hurdle of moving from an external income source (from a job) to an internal income source (from your retirement savings)?  Here are a few tips to help focus your mindset on appropriate spending of your retirement savings:

Consider your fixed distributions from retirement savings a “paycheck”.  Once you enter retirement, your financial advisors will help you determine a fixed monthly amount to draw down from your savings to fund regular monthly expenses.  If it helps, consider these fixed distributions like you did a regular paycheck: as income meant to help you live comfortably.  The distributions are meant to be spent on your living expenses.

Let go of an inheritance ideal.  Chances are, if you’ve planned well with a wealth advisor and your risk tolerances are properly incorporated into your financial plan, you’ll have plenty of assets left to pass down to your children.  Now is the time to enjoy your retirement savings and use them to be more comfortable, engaged, and safe in your retirement.  For some, that might mean spending more on travel or leisure activities, for others it’s splurging on a nicer living environment when your health needs dictate a move.  Now is the time to use your retirement savings to live, whatever that may require; conserving a very specific and inflexible amount you feel you must leave to your beneficiaries is a good way to spend the last years of your life unnecessarily stressed about your finances.

Allow your expenses to fluctuate with the market.  A downturn in the market could be a good time to tighten the reins on your spending if it makes you feel more secure. But if you experience some unexpected invest­ment gains, the timing might be right for that dream vacation with the family.  An investment professional can help you objectively decide if your portfolio is reflecting an “up” or “down” market environment and if you could adjust spending accordingly.

Review your plan frequently with your wealth advisor.  A Cranbrook Wealth investment professional can run hypo­thetical simulations based on different withdrawal rates, how many years you expect to live in retirement or any other contingencies, which will allow you to develop a better idea of how much you can comfortably spend in retirement to help achieve your goals.  As your retirement progresses, your financial advisors can help you adjust your plan to best meet your goals.

Spending in retirement is both a financial and psychological change that many new retirees struggle with.  To feel more secure about your retirement spending habits, contact your Cranbrook Wealth investment advisor.