Transitioning from Saving to Spending in Retirement
For many retirees, the transition from saving to spending can be a challenge. After so many years of carefully saving up your money, it isn’t always easy to let it go. On the other hand, letting it go too easily can be a problem, too.
In this guide, we’re going to look at how to balance your needs to make the most of your retirement savings. Let’s dive in!
Key Takeaways
Transitioning to a spending mindset in retirement can be challenging for several reasons, including uncertainty about the future.
This hesitance can ultimately do more harm than good during retirement.
Creating a reliable financial plan, including a budget and withdrawal strategy, will help give you peace of mind.
Why the Transition to Spending Can Be Hard
When retiring, the transition to a “spending mindset” can be a struggle for several reasons. Understanding those reasons may help you adjust your perspective.
1. Attachment to Savings
Many of us develop a sense of security from our savings. You worked hard for it, after all. The idea of “giving it up” can be painful. You’ve watched your retirement fund grow for years, and now you might have to watch it get smaller. No one likes that.
Even with a reliable budget, that feeling is hard to shake. As a result, many of us are prone to clinging to our retirement savings.
2. Changing Your Financial Mindset
During our working years, the focus is on growing assets, minimizing expenses, and preparing for the future. Over time, it’s easy to get stuck in that mindset. Spending money just feels wrong. How can you shift to a retirement mindset where spending your nest egg is suddenly okay?
3. Uncertainty About the Future
Life is full of unknowns. How many years will you have to support yourself through retirement? What happens if you run out? What health problems might arise? What if the market changes
With so many questions up in the air, it’s tempting to lock up and hang onto your finances as a safety net. Better safe than sorry, right? But while it is good to be cautious, that way of thinking can ultimately do more harm than good.
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How to Spend Safely in Retirement
When the time comes to step into retirement, hoarding your savings may not be wise. Here are some tips on how to transition to a spending mindset while protecting your finances for the future.
1. Give Yourself Permission to Spend
One of the first steps to spending in retirement is giving yourself permission. Remember: This is precisely why you saved your money to begin with! You put a portion of your finances aside for a purpose, and this was it. After all that effort you put into saving for the future, it’s finally time to enjoy the fruits of your labor.
2. Make a Plan
Drawing up a reliable budget is essential to using your money wisely during retirement. It can also give you peace of mind when spending your money. By calculating how much you can afford per month, you’ll know what your limits are. As long as you stay within those lines, you can use your retirement income without having to worry or feel guilty.
PRO TIP: When creating your retirement budget, include all projected expenses, from daily living costs to healthcare and potential big-ticket items like travel or home improvements. Leave plenty of room for unexpected expenses, and don’t forget to factor inflation into your plans!
3. Pick a Withdrawal Strategy
When withdrawing funds from your retirement account, there are several possible strategies:
Systematic withdrawal plan: This strategy involves withdrawing a fixed percentage from your retirement accounts each year. A common guideline is the 4% rule, where you withdraw 4% of your retirement savings in the first year and adjust that amount for inflation in subsequent years. This approach provides a steady income stream while aiming to preserve the principal for as long as possible.
Account sequencing: In this method, withdrawals are taken from accounts in a specific order to optimize tax efficiency. Typically, retirees first withdraw from taxable accounts, followed by tax-deferred accounts like traditional IRAs and 401(k)s, and finally, tax-exempt accounts like Roth IRAs. This strategy helps manage tax liabilities by allowing tax-advantaged accounts to continue growing tax-free for a longer period.
Proportional withdrawal: This strategy involves withdrawing a fixed percentage from each account type annually. The withdrawal percentage is determined based on the proportion of retirement savings in each account. This approach helps to smooth out tax liabilities over the years and can provide a more stable income stream.
Dynamic withdrawal strategy: Unlike the fixed withdrawal strategy, a dynamic approach adjusts withdrawals based on market performance and other factors. For instance, in years when your portfolio performs well, you might withdraw a bit more, and in down years, you might reduce your withdrawals to preserve capital. This method requires a more hands-on approach and regular monitoring of your financial situation.
Bucketing strategy: This involves segmenting your retirement savings into different "buckets" based on the time horizon for their use. For example, one bucket might contain funds for immediate needs (1–5 years), another for mid-term needs (5–15 years), and a third for long-term needs (15+ years). Each bucket is invested differently, with shorter-term buckets holding more conservative investments and longer-term buckets holding growth-oriented investments. This strategy helps manage market risk and ensures that you have funds available when needed.
These strategies can all get complicated fast. A fiduciary financial advisor can explain your options and help you pick the right option for your retirement plans.
PRO TIP: Revisit your withdrawal strategy annually. Regularly reviewing and adjusting your withdrawal plan can help adapt to changing financial needs and market conditions.
4. Maintain a Diversified Investment Portfolio
Even in retirement, maintaining a balanced investment portfolio is crucial. A common mistake is shifting entirely to conservative investments like bonds, which may not keep pace with inflation. Instead, a diversified portfolio that includes some growth-oriented investments can help sustain your purchasing power over the long term.
5. Plan Your Social Security Strategy
Deciding when to start taking Social Security benefits can have a major impact on your retirement income. For example, delaying benefits beyond your full retirement age can increase your monthly payments by 8% per year until age 70.
However, waiting too long may not be an option. Be sure to consider your health, life expectancy, and financial needs when deciding when to claim your Social Security benefits.
6. Talk to a Financial Advisor
A qualified financial advisor can be a major asset when beginning your retirement journey. Your advisor can help you develop a comprehensive financial plan that includes:
Withdrawal strategies
Tax optimization
Investment advice tailored to your unique needs and goals
This doesn’t have to be a one-and-done partnership, either. Working with an advisor long-term will help you adjust your plans for any changes in the market or your personal finances, giving you better results over time.
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Get Help from TrueWealth Today!
We hope this guide has helped you understand how to transition from saving to spending in retirement. If you’re preparing for retirement, we’re here to help you save more so you can spend it later.
At TrueWealth Financial Partners, we give workers and retirees the support they need to make their golden years truly golden. When you work with TrueWealth, you’ll get the full benefit of:
Years of experience in our field
The client-centric promise of a fiduciary advisor
Genuine personal care from the TrueWealth team
If you’re ready to make the most of your retirement plans, schedule a free consultation today. We’ll take the time to understand your unique needs, then get started on a financial strategy tailored to your goals.
We look forward to hearing from you! Let’s talk.
FAQs
Why is it hard to spend money during retirement?
Many retirees struggle with spending in retirement due to a long-standing habit of saving, fear of running out of money, and uncertainty about future expenses.
What is the 4% rule in retirement planning?
The 4% rule suggests that retirees withdraw 4% of their retirement savings in the first year and adjust that amount for inflation each subsequent year, aiming to provide a steady income stream while preserving principal.
Should I invest conservatively in retirement?
While it's important to protect your savings, maintaining a diversified portfolio that includes some growth-oriented investments can help keep pace with inflation and sustain your purchasing power.
When should I start taking Social Security benefits?
The best time to start taking Social Security benefits depends on your health, financial needs, and retirement plans. Delaying benefits can increase your payments, but it may not always be practical. Your financial advisor can help you pick the best timeline for your situation.
How often should I review my retirement plan?
We recommend reviewing your retirement plan at least annually or whenever there are significant changes in your financial situation, market conditions, or personal circumstances.
How can I make my retirement savings last longer?
Strategies to extend the longevity of your savings include:
Controlling expenses
Optimizing your Social Security benefits
Maintaining a diversified portfolio
Opting for withdrawal strategies that preserve capital.
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