Why Retirees Still Worry—Even with a Solid Plan
When you were working, the whole point of saving was to make sure you’d have enough to enjoy retirement—doing what you want, when you want, without stressing about money. Now, even if you’re in a solid financial situation and possess a strong portfolio, you might find yourself hesitant to spend money. How do you go about enjoying your retirement years without the added fear of finances?
What’s Stopping You?
If you’re retired and saved money during your working years, it’s time for you to enjoy the life you’ve created. But if you’re concerned about running out of funds, try to determine exactly why you feel this way.
Concerns about long-term care. You might not even consider the equity in your home as part of your financial nest egg. Including the equity in your home as a potential resource to pay for long-term care can give you an extra layer of security if you end up needing it.
Fearing the markets. Remember the phrase “this too shall pass.” Every trigger that causes the market to fluctuate is different. Every day, businesses determine how to make things people want to buy, and consumers think about what they want to, and can, buy. Together, they harness these actions to affect the markets. Having a sufficiently diversified portfolio can help weather any potential storms.
Switching from saving to spending. Successful savers have developed a habit of spending less than they’ve earned. The ability to spend works at odds against your saving impulse, and it can be difficult to switch that mentality. If you’ve worked with your advisor to develop a thoughtful, well-laid-out plan and you have confidence in its methodology, remind yourself that it’s OK to spend.
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Don’t Forget About Fixed Income Sources
While many retirees focus on their portfolios, they often forget about other types of income that might kick in during retirement. These include fixed income sources, like Social Security, pensions, and annuities. Regardless of the market, these sources can provide you with consistent income.
When creating a budget, compare your level of savings against your level of planned expenses, less the fixed income amount. Say your fixed income sources equal $5,000 per month, and you plan to spend $10,000. The difference is $5,000 each month, or $60,000 a year. With a $1.5 million portfolio, the necessary annual draw of $60,000 represents only 4%.
Know the 4% Rule
In the 1990s, financial advisor Bill Bengen, CFP®, developed the “4% Rule” when it comes to retirement planning. He examined 30-year time periods beginning with the Great Depression through the mid-1990s and examined the maximum rate someone could spend at the beginning of retirement and still have money left.
His findings suggest that traditional retirees can reasonably consider withdrawing 4% the first year of retirement and adjust that percentage annually to reflect inflation for the next 30 years. Additional analysis in subsequent years has found the 4% rule to continue to hold, but every situation is different. Your advisor can help you determine what works best for you.
Build an Ideal Future Instead
If you’re having a tough time spending what you can afford or feel guilty for treating yourself, there are ways you can spend your money to benefit your life and others.
Give gifts to children while you’re still living. Make life easier for your children and grandchildren by opening a 529 account or Roth IRA in their names. Over time, that money will grow and help them plan for their futures.
Spend money on experiences. Bring your extended family together for a memorable trip. Author Bill Perkins wrote about “memory dividends” and how you should go out and do something you want to do sooner, rather than later, so you have more years to enjoy the memories.
Donate to meaningful charities. Do you know of a charitable organization that touched your heart and caused you to see the good? Consider donating money to help it achieve its mission. Making contributions during your lifetime can provide opportunities to enjoy seeing the fruits of your giving, and may help you save on taxes at the same time!
Pay for services to save you time. What are some chores you’re doing that you could pay someone else to do? Pay someone else to cut your grass, shovel the driveway, or clean your house and give yourself back one of the most precious gifts: the gift of time.
The Bottom Line
You may have an idea of what spending should look like in retirement, but make sure it’s based on evidence and is reasonable. One key piece of advice is to avoid giving yourself an artificial rule. Don’t say, “I can’t retire until I pay off my mortgage,” or “I won’t quit until I have $3 million saved.” It’s easy to get caught up in the checklists provided by outside sources, but everyone’s situation is different. In the end, the numbers sometimes become arbitrary.
Tim Maurer, CFP®, an author and frequent speaker, has a quote you should remember: “Personal finance is more personal than finance.” The advice we provide at Savant is personalized, and we know everyone’s situation is different. Let us help ease your worries about money in retirement so you can work toward living the life you deserve.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Joel Cundick
Lead Advisor / Financial Advisor
CFP®, AIF®