Toni F. from San Antonio, TX asks: Hello Mitch, I’ve been retired for a few years now. I’ve noticed something about myself as I think about my nest egg and the future, which is: that I seem to be very reluctant to spend! I’m worried as I’m sure many retirees are about running out of money, living too long, needing a lot of medical care later in life, etc. Do you have any advice for retirees about these types of concerns? Thank you.
Mitch’s Response:
Thanks for writing, Toni, and you’re absolutely right – many retirees (especially the newly retired) often grapple with ‘feeling good’ about spending some of their hard-earned savings. The worry you’re feeling is quite normal.
One of the foremost thinkers on the psychology of money, Meir Statman of Santa Clara University, says that fear is the key reason folks become so reluctant to spend retirement savings. Fear sets in at the moment when retirees finally “have the time and the money and wisdom to enjoy their lives in a way they never could before.”1
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Part of this reluctance is learned behavior. Consider that you’ve spent decades saving money and investing to reach this point. In a sense, your brain may be somewhat hard-wired to view saving as good and spending as bad, which makes doling out money for a second home or a vacation especially challenging. According to Statman, taking money out of your retirement accounts can feel just as painful as watching your account value decline with market volatility or a downturn. So again, what you’re experiencing is understandable.
As for the advice portion of your question, I think the first step is to work with a financial advisor to do some cash flow modeling and to run scenarios for how your investment portfolio and liquid net worth will hold up against various return outcomes—and over an extended time horizon. If you’re in good health, I would not hesitate to assume you’ll live to be 100, which will help you build in conservative estimates into your projections.
Another good piece of advice, in my view, is to allocate your fixed cash flow sources—like Social Security, pensions, fixed annuities, etc.—to your everyday needs. These would include food, mortgage/rent, utilities, and healthcare. Once you ‘cover your bases’ with a reliable source of income, you can start to think more about discretionary spending.
I think it’s important to outline your retirement goals, whether that be traveling or helping kids and grandkids, and match these against the level of cash flow your investment portfolio can provide you over a 30+ year time horizon. The goal would be to ensure that your savings could withstand even the worst 30-year period in U.S. economic and market history, which you can learn from simulations that account for volatile returns and annual withdrawals. In nearly all cases, having a more than 50% allocation to U.S. equities and withdrawing 3% to 4% of your portfolio each year would mean you’d still have money left over after 30 years.
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Disclosure