It may seem hard to believe, after you’ve spent decades setting aside funds for retirement, that you could ever have trouble actually allowing yourself one day to spend what you’ve saved. But for many if not most retirees, that’s the core of the problem. The hardest part of retirement is actually not the commitment to save – it’s the permission to spend.
As evidence of this phenomenon, we call your attention to this interesting article we just read from CNN. In it, business reporter Jeanne Sahadi speaks with a variety of financial experts to explore the reasons why so many retirees are reluctant to allow themselves to spend down some of the funds they’ve set aside to afford their retirement lifestyle. As we read this article, we couldn’t help thinking that this is an ideal application for a financial dashboard – a tool that acts like a crystal ball, giving you confidence to make financial decisions today with greater clarity about tomorrow. We’ll say more about the financial dashboard later in our AgingOptions Blog post.
Now Comes the Hard Part
“You’ve been working and saving for decades for just this moment: retirement,” says CNN’s Sahadi. “Even though you may be ready to stop working full-time, now comes the hard part: Actually letting yourself use your savings, since you no longer will be bringing in that paycheck, which until now has covered your monthly expenses.”
Sahadi acknowledges that this is a huge and challenging change in perspective. “Making the psychological shift from saver to spender – not to mention nest egg manager – is no small feat for most people.” She spoke with AARP policy advisor David John who called the prospect of drawing down one’s hard-earned savings “almost physically painful” for millions.
Savings Remains Largely Untouched
As the CNN article suggests, there are plenty of reasons why retirees are reluctant to spend. “Unpredictable factors like market performance, life expectancy and health issues make spending your money easier said than done,” according to the AARP’s John. Retirees are hesitant to tap their savings because they think they’ll be putting themselves in jeopardy.
Sahadi writes that most retirees remain frugal even decades into retirement. “Research shows that among retirees with savings, many do not draw down very much,” she writes, “choosing instead to live off fixed sources of funds, such as Social Security or pensions or income from part-time work they take up. A study by Black Rock found that the vast majority of retirees still have at least 80 percent of their savings after two decades in retirement.”
Certainly, the robust stock market has helped preserve savings for many retirees, at least until recently. Still, the hesitancy to spend persists even among retirees with significant means. “The psychological reluctance to tap one’s savings is a factor for most people regardless of their financial wherewithal,” says CNN. “And it may become more acute for soon-to-be retirees as they face inflation, volatile markets and a lack of pensions.”
The Purpose of Saving is to Enjoy It, Not to Keep It
For her article, Sahadi spoke with several financial planners, some of whom seem to be at least approaching a simplistic version of the financial dashboard concept. One planner, Kyle Newell, told CNN that he continually reminds clients that the savings they worked so hard to amass is there to help them live well in retirement. “I tell them, now the money is doing the work [so] they don’t have to. That seems to help people,” said Newell. He says he “runs projections for his clients to help them see if they can afford to spend a little more than they may assume.”
Another planner who spoke with Sahadi for the article, David Edmisten, says he has clients who “fixated on having the same amount of money or more when they die.” He said he asks a simple question: Why is that important to you? “I try to ask them what’s the purpose of the money,” Edmisten told CNN: “To have it? Or to use it as a tool to do what you want and to avoid what you don’t want?” He helps clients come to view their savings as the means to an end to accomplish goals they consider important.
Edmisten has particular advice for new retirees: relax. “He also advises clients to go easy on themselves and view their first year in retirement as a learning experience when it comes to spending,” says the article. “They’re trying to figure out who they are now that their primary career is over and figuring out what they can and can’t do financially, he said. ‘I had a client with millions who asked me if he could buy a used car.’”
A Few Practical Steps to Shift Your Perspective
CNN’s advice in this article is fairly straightforward, starting with the basics. “It’s hard to manage your money well in retirement unless you’re realistic about what’s on the table,” says Sahadi. “The first thing to do is to make a budget, and sketch out a plan to cover your expenses,” which allows you to “harmonize” your income and saving with your spending.
This process, says the article, begins before you retire. “Keep track of your spending and regular expenses, like housing, food, health care, et cetera,” Sahadi recommends. “Then assess how those expenses might change in retirement (e.g., if you plan to move to a less expensive home or area; and if you’ll qualify for Medicare or if your insurance costs will be subsidized by your old employer).”
Once you have a clear and accurate understanding of actual spending, calculate your anticipated retirement income. “The difference between your expected outlays and your fixed income is the amount you will need to draw from your savings,” says the article.
Build a Cash Bucket
The second tidbit of advice from the CNN piece is to set aside cash. “Once you have that [budget] number, build a cash bucket that can cover what you’ll need for a year or two so you won’t be forced to sell anything if the market heads south, or you retire into a bear market,” says the article. Financial planner David Edmisten recommends 12 to 24 months’ worth of cash on hand. That way, when the next recession hits, you won’t have to sell a stock to meet spending needs – especially during a market downturn.
Edmisten goes further, acknowledging that preparation for retirement can be a “deer in the headlights” experience. “The one common feeling I hear most is that my clients say they are overwhelmed with all the choices they need to make to live off their savings in retirement,” he told CNN’s Sahadi. “With the different types of accounts many have, the potential for penalties and higher taxes if withdrawals are taken incorrectly and sorting out how their investments may need to shift for retirement income, it can be a lot for a new retiree to get their head around.”
Our Solution: a Financial Dashboard
As we read the CNN article, we’re struck by what seems like overly simplistic advice to solve a complex psychological problem. We asked Rajiv Nagaich of AgingOptions for his take on why retirees are unwilling to spend. To him, the answer is clear.
“I think it comes down to one word,” said Rajiv: “fear. People fear the unknown, and retirement is a big unknown for most people. But,” he adds, “that fear is made worse because they haven’t done the right kind of planning. They might have various pieces in place, but there’s no underlying strategy to tie everything together. We have a ‘silo mentality’ when it comes to planning that really does everyone a disservice.”
Rajiv’s answer to fear of spending in retirement is a financial dashboard, which we’ve discussed many times on the radio and here on the Blog. “Look,” says Rajiv, “people aren’t stupid. The reason they’re reluctant to spend is because no one has given them the tools to be able to evaluate whether or not they’re making a wise decision. With a financial dashboard in place, you can see at a glance what the outcome of today’s spending, saving and investing decisions will be. Then you can make an informed choice. The antidote to fear is good, solid, relevant information. That’s what a financial dashboard provides.”
My Life, My Plan, My Way: Get Started on the Path to Retirement Success
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(originally reported at www.cnn.com)