If you are fortunate enough to be a member of the retiree club, congratulations! You weren’t able to make it here by a stroke of luck or good fortune. Chances are, you worked hard for a number of years, made a strong effort to invest and save money, and lived well within your means. So now you get to reap the rewards of a life’s worth of financial decisions by spending as you please and living how you’d like, right? Maybe not. Unfortunately, many retirees are still very much ingrained in savings-mode or, even worse, harbor a lack of confidence in their very stable (and sometimes even over-funded) financial status. According to a study conducted by the research firm, Hearts & Wallets, 28% of retirees withdrew less than 1% of their nest egg in the year 2014. To put this in perspective, most financial planners consider withdrawing up to 4% annually a safe action. For many, financial decisions can become a much more emotional process as time goes on, but it doesn’t have to be this way! You’ve worked hard your whole life in order to save for retirement, so it’s only natural to have hesitancies about spending. However, retirement should be enjoyable, filled with simple pleasures and the occasional splurge. If you find yourself uncomfortable with the thought of spending your retirement savings, here are some practices that may help:
- Create your own “pension plan” by establishing a systematic withdrawal from your investment account(s). This would generate a consistent stream of income much like having an actual pension plan. One way to implement this would be to determine whether your Social Security (or other fixed income sources) covers your monthly fixed costs (mortgage, car payments, health insurance, etc...) and if it does not, establish a systematic withdrawal from your investments to cover the difference. If you are unaware of what your monthly fixed costs are, try building a budget. If you have difficulty doing this on your own, have no fear, Thrive has the tools to help!
- Set up a Sweep Account that allows you to automatically deposit any dividends and interest you receive on investments into a money market account, rather than reinvesting them. This is an accessible and tax efficient way of getting money out of your account(s) while leaving your principal untouched (a practice that may be habitual for you at this point).
- Reconsider your legacy goal if it is currently so high that it interferes with your quality of life. Many loved ones would much rather see you living comfortably and enjoying life in your later years than receive an additional amount of money from your estate when you pass. Another option is to consider making gifts while you are alive so you have the opportunity to see the joy they bring.
- Be open to larger expenses, especially if they allow the potential for saving in the long run. Consider replacing your older car that currently provides considerable business to the local auto-repair shop, or maybe make a home improvement that eliminates the possibility of damages from Mother Nature. Also consider life experiences with a spouse or loved ones, such as a vacation, that may provide you with non-quantifiable dividends every time you relive the experience through a picture or conversation.
While financial activity in retirement may initially make you anxious or uncomfortable, there are many ways to work through this in a responsible manner. The saving habits you’ve established to make it to retirement may be hard to break, but there are still a large variety of financially responsible actions (only some of which have been listed) that you can take to help ease the transition from a frugal employee to a financially stable and happy retiree.