It’s difficult to overstate the risk of spending too much in retirement (or saving too little for retirement). Running out of money means moving in with your children, going back to work, or surviving solely on Social Security. It’s safe to say that most Americans are more concerned with running out of money than having too much money. After all, is spending too little in retirement even a problem? It doesn’t have the same dire consequences, but spending too little can negatively impact your retirement. Here’s how to know if you should be spending more in retirement.
Transitioning from saver to spender
If you don’t save enough for retirement to begin with, you don’t need to worry about spending too little in retirement; you couldn’t even if you wanted to. For financial mutants who are more accustomed to saving than spending money, transitioning from saver to spender can be difficult. You may still have a scarcity mindset, which could get worse when you are no longer working and your only income is from your retirement portfolio and Social Security.
The data shows that those who are great accumulators may not be so great at spending. A study published a few years ago followed Americans with different levels of retirement assets for about two decades, starting when they retired. They found that for those with over $500,000 in retirement assets, their portfolio had barely declined from when they first retired – dropping from an average value of $857,000 to $756,000. 35% had seen their retirement assets grow since retiring.
This isn’t necessarily a problem. If you’ve been retired for 20 years and have seen your retirement portfolio grow, it could indicate greater-than-expected returns, a more conservative retirement plan, or legacy goals that require your accounts to continue growing (or at least maintain a certain level of assets). For some, though, dying with too much money could be a sign of a poor retirement plan and missed opportunities.
What are your retirement goals?
Do you have legacy goals, such as leaving a large sum of money to your children or charity after you die? If given the choice between retiring at 55 with a 93% chance of a successful retirement, according to retirement software simulations, or retiring at 60 with a 99% chance of success, what would you choose?
Retirement planning isn’t always about creating the most conservative plan with the highest chance of success. It should account for your personal goals and ambitions, which often are to retire earlier or spend more in retirement. It is a delicate balancing act, and tilting the scale too far in either direction has consequences. Spend too much or retire too early and you risk running out of money. But if your plan is too conservative, you could risk working a job you hate several years longer than necessary, or not spending money you could afford to spend while you have the health to enjoy it.
How do I know I can spend more?
So how do you know you can spend more in retirement or retire early? Here are some signs to keep an eye out for.
- It never feels like you’ll have enough saved.
Never feeling like you can save enough is a sign that you are a chronic oversaver. You have to learn to accept that you can’t simply save enough for every possible retirement. Even with the best plans, there is a small chance your plan won’t work out – that you’ll have to cut your retirement spending, go back to work, or get help from family. That uncertainty will always exist, no matter how much you save. Learn to accept it instead of trying to save enough to account for every possible what-if.
- You can’t imagine how you’ll spend all of your retirement assets.
Do you ever look at the balance of your retirement accounts and wonder how you’ll ever spend it all, even with a safe and conservative withdrawal rate? This could be a sign that you should consider saving less, spending more in retirement, or retiring early. Take the time to create a retirement budget and compare that to how much income you expect to receive from your retirement accounts if you keep contributing the same amount annually. If it looks like you will have more than you know what to do with, it may be time to ease off the accelerator.
- Your portfolio goes up significantly every year, even after taking distributions.
If you are already retired and your portfolio goes up significantly every year, that is one of the most sure-fire signs that you can think about spending more in retirement. You can’t go back in time and retire earlier, but you can spend more now while you have the health to enjoy it. We aren’t guaranteed tomorrow, and that is no excuse to live recklessly today, but it may mean reevaluating your spending habits and enjoying more of your wealth while you can.
- Your financial advisor tells you to spend more money.
If your fee-only financial advisor is encouraging you to spend more money in retirement, that’s probably a decent sign that you can increase your spending. It is more common than you’d think for advisors to encourage their clients to spend more while they can enjoy it. Trust your financial advisor that has experienced dozens or hundreds of retirements to know when it is time to live a little and start spending more money.
Transitioning from working to retired, and from saver to spender, isn’t easy. Your entire life you’ve been taught the value of hard work and living on less than you make, and you can’t just flip a switch to turn that part of your brain off. Many retirees, especially our financial mutants, compensate by living well below their means in retirement. They fail to recognize that spending too little can be harmful just as spending too much can be harmful. It could mean working longer than you would like, having less time with your family, or not spending as much money on what makes you happy. Consider whether you are at risk of spending too little in retirement, and if you are, what you can do differently.
