Many retirees find that after saving for decades, it’s difficult to draw from their nest egg. Even when their financial plan shows they can comfortably afford to take a trip, carry out a home renovation or travel to spend time with family, there may be reluctance.
“Underspending is a quiet but widespread crisis, and it carries a real irony,” said Ronnie Cox, investment director at Human Interest Advisors in San Diego in an email. “People spend their whole lives sacrificing to build freedom, then let fear stop them from enjoying it.”
In many cases, retirees can achieve a balance between protecting a nest egg and enjoying the retirement years.
[Read: What Is the Average Retirement Savings Balance by Age?]
Why Underspending in Retirement Happens
For many retirees, the biggest hurdle is psychological rather than financial.
“Something I’ve observed over the years is that the habits that help people build wealth are usually the same habits that make retirement emotionally challenging,” said Rebekah J. Fero, certified financial planner and founder of Fero Financial in Port Charlotte, Florida, in an email.
Many retirees have spent decades living below their means, making thoughtful financial decisions, and consistently saving for the future. By retirement, those behaviors have become second nature. “Then retirement gets here, and suddenly they’re expected to switch form saving to spending,” Fero said.
This pattern of underspending can happen regardless of nest egg size. “Whether they’ve got $1 million or $20 million in their 401(k), most people are hesitant to spend their own money at first,” said Adam Spiegelman, certified financial planner and founder of Spiegelman Wealth Management in Alamo, California, in an email. “There’s a real psychological shift involved in going from getting a paycheck every couple weeks to relying on savings you spent decades accumulating.”
Finding the Right Balance
While retirees shouldn’t overspend, they also don’t want to become so cautious that they miss out on experiences they’ve been looking forward to enjoying for decades. “A balance comes from having a plan that gives you confidence,” Fero said. She recommends understanding where retirement income will come from, how taxes fit into the picture and how each investment supports your long-term goals.
Having a retirement spending plan can also make it easier to budget for living expenses and experiences. For instance, if travel has always been meaningful to you, consider building an annual vacation fund into your retirement budget. If spending time with family is important, you can account for holiday gatherings or regular reunions.
“On the flip side, overspending is its own real risk, especially somewhere like the Bay Area, where I’ve seen clients with multimillion-dollar properties watch their liquid assets run down,” Spiegelman said. “Selling the primary residence to fund retirement means relocating plus a major tax hit. Either direction, underspending or overspending, comes back to the same fix.” You’ll want to plan, revisit the plan often and build in enough flexibility to adjust as life goes on.
[Read: 401(k) Mistakes to Avoid.]
Give Yourself Permission to Spend
In some cases, it can be helpful to talk through your spending plans so that you can develop a healthy financial mindset. “I’ve had clients tell me at review meetings, after years of saving, that they finally upgraded to first class, bought the car or took the whole family on vacation, and I’m genuinely thrilled for them,” Spiegelman said. “Some literally ask me for ‘permission’ to spend their own money.”
Feeling comfortable about spending can become easier when retirees regularly revisit their financial plan. Evaluating investment performance, expected expenses and long-term goals with a financial professional can help you see if spending is within the plan. You can make adjustments as you look ahead and get ready for family events or activities with friends.
“The key is to stop starting with a withdrawal formula and start with the design of the income itself,” Cox said. “You help remove the anxiety by building a predictable income floor.” This can help you see that a certain amount will cover your regular expenses every month.
Don’t Wait Too Long
One of the greatest risks of underspending is waiting so long that you no longer have the stamina or health to enjoy the retirement experience you want to have.
“With clients in their 70s and 80s, the conversation becomes: ‘You’ve won the game,'” Spiegelman said. “At some point you won’t want to fly anywhere. So what’s the money for? It’s going to taxes, your kids, charity or you. We’ve already planned for long-term care and the big what-ifs. But make sure you don’t have regrets.” He suggests looking at your bucket list and talking to a financial advisor about what you’ll be able to accomplish while you’re still active.
[Read: How to Retire on a Cruise Ship]
Retirement Spending Should Match Your Goals
If you’ve created a comprehensive retirement plan, accounted for healthcare costs, maintained an emergency fund and still regularly review your finances, you may be able to spend more comfortably than you realize. That could mean taking the dream vacation you’ve postponed for years, replacing aging furniture, upgrading your home or enjoying more dinners out with family and friends.
When you look at your goals, you’ll want to think about priorities and how big of an account balance you want to maintain. You might find that using the money you’ve accumulated in a way that reflects your values and lifestyle preferences allows you to more easily enjoy retirement.
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Underspending in Retirement: Why You Should Take That Trip originally appeared on usnews.com
