It is possible to squirrel away funds for your golden years while still enjoying life
You have worked your whole life to save up enough to retire. And now you have — but you are afraid to spend those hard-earned savings.
Being frugal in retirement may seem like a good thing. You are most likely living on a fixed budget with no more paychecks flowing in. For many retirees, however, concerns about outlasting their savings leave them limiting themselves unnecessarily.
For many retirees, the “biggest hurdle is psychological rather than financial,” said U.S. News & World Report. “Many retirees have spent decades living below their means, making thoughtful financial decisions and consistently saving for the future,” which means that “by retirement, those behaviors have become second nature.” It can be hard for these retirees to suddenly change their money mindset and pivot to spending the retirement savings they worked so hard to accumulate.
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Fear is another component. “According to a recent survey by the Employee Benefit Research Institute, more than three in four retirees agree they can afford to spend freely — but nearly half say they still underspend out of fear they’ll run out of money,” said Charles Schwab.
Then there is the very real puzzle of figuring out an appropriate amount to spend. After all, it is impossible to know how long you will live or how well your investments will perform.
The risk of overspending in retirement is obvious; the risk of underspending may be less so. But “according to financial advisors, it ultimately amounts to something similar: not living as fulfilling a life as one could have,” said CNBC. “It represents a life not lived, the vacations you didn’t take because you were afraid you were going to run out of money,” said certified financial planner Marianela Collado to the outlet.
Sure, you can ultimately pass on what remains to your heirs or to a charity or another organization of your choosing. But by playing it safe and never tapping into what you worked so hard to accrue, you never get to reap the rewards of all that labor.
Admittedly, the “‘right’ withdrawal rate is far from settled science, in that you’re trying to figure out how much to extract under uncertain market conditions and an unknowable time horizon,” said Morningstar. Instead of trying to come up with a hard-and-fast withdrawal rule that will last throughout your retirement, think of it as something you can continually reassess as your circumstances shift.
Known as “flexible withdrawal strategies,” these “ebb and flow with a portfolio’s balance,” said Morningstar. Such strategies may allow you to withdraw more of your portfolio during your own lifetime “rather than leave behind big balances after death.” Maybe you slow down your spending after a big year of travel, for example, or a market downturn. As long as you allow yourself to ramp it up when things are going well and you have golden years you want to live to the fullest.
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She previously served as a deputy editor and later a managing editor overseeing investing and savings content at LendingTree and as an editor at the financial startup SmartAsset, where she focused on retirement- and financial-adviser-related content. Before that, Becca was a staff writer at The Week, primarily contributing to Speed Reads.