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Opening the Spigot

Jonathan Clements

BEEN A DILIGENT saver during your working years? Upon retirement, you’ll likely find it tough to transform yourself into a happy spender. This is not a problem you’ll read much about—because it isn’t exactly a widespread affliction.

The fact is, most folks struggle their entire life to control their spending, only to reach retirement with too little saved. At that point, they have no choice but to tighten their belt. Indeed, the statistics are alarming. For 50% of couples and 70% of single individuals, Social Security accounts for at least half of their retirement income. If you exclude the value of Social Security and pensions—but count real estate—the typical household approaching retirement age has a net worth of just $175,000.

But what if you’re among the minority, those avid savers who reach retirement in good financial shape? This is the moment to reap your reward. But if you’re like many HumbleDollar readers, you’ll find it hard to flip the switch from saving to spending. What to do? Here are five thoughts:

1. Just Say No. If you’ve always thought folks were idiots for lavishing money on spanking new European luxury sedans, you shouldn’t buy one just because you retire with a plump nest egg. In all likelihood, it would be a deeply uncomfortable experience, you’d suffer terrible buyer’s remorse—and you’d think less about the marvels of German engineering and more about your emptier bank account.

The fact is, money can buy many things, but perhaps the important thing it can buy is a sense of financial security. Retirement often brings a heap of anxiety. Not only are we giving up our paycheck, but also there’s a slew of risks to worry about. Among them: We might outlive our money, get hit with a big bear market right after we retire, incur steep long-term-care costs, and suffer high inflation or low average investment returns throughout retirement.

A fat nest egg can ease these worries. There’s great pleasure in knowing we never again need worry about money, though occasional anxious moments are pretty much unavoidable.

That brings me to an important distinction: You might choose not to spend, because not spending delivers greater happiness than spending. But if you’re choosing not to spend out of fear, you should probably seek out a social worker or a psychologist, so you can better understand what lies behind your anxiety. Each of us gets to travel this road just once, and you don’t want to reach the end of the journey filled with regrets.

2. Ponder Your Passions. We spend decades preparing financially for retirement and yet we often give scant thought to what we’ll do with all that free time. Approaching retirement? Start thinking.

Retirement is a chance to devote our days to work we’re passionate about, without worrying about whether that work comes with a paycheck. If we can figure out what we really care about—for some it will be easy, for others it may take trial and error—retirement has the potential to be the most fulfilling time in our life.

Maybe pursuing our passions will cost very little. Maybe it’ll cost a lot. But either way, if we are passionate about what we’re doing, we’ll likely have few qualms about the price tag involved.

3. Head Games. Experts often recommend that retirees use a 4% annual withdrawal rate. A popular strategy: Each year, we should sell the prescribed amount from either our stocks or our bonds—depending on which has lately performed best—and then direct the proceeds to a cash account that’s used to cover spending in the years ahead. Problem is, this strategy can create anxiety, because we’re constantly pondering how much our portfolio is worth and what we ought to sell, and that can deter folks from spending.

What’s the alternative? You might minimize the handwringing by taking an old school approach—and declaring some money fair game for spending and other money off-limits. For instance, you might give yourself permission to spend your Social Security benefit and all of your portfolio’s dividends, interest earnings and mutual fund distributions, while keeping your fears at bay by never selling any securities. What if that doesn’t give you enough income? You might bite the bullet, buy an immediate fixed annuity and then allow yourself to spend those monthly checks.

There’s nothing novel about this advice. Folks have long allowed themselves to “spend income, but never dip into capital.” Experts often pooh-pooh such an approach as sub-optimal. But guess what? It may not be a strategy favored by economists, but it works for humans.

4. Foot the Bill. If you balk at spending money on yourself, consider spending it on others. Think of it as a chance to exploit three of the great insights from happiness research—that spending on others often delivers greater happiness than spending on ourselves, that experiences bring greater happiness than possessions, and that friends and family are a huge source of happiness. Indeed, the reason experiences can be so fun is they’re typically enjoyed with others.

Some possibilities: Foot the bill for the family reunion, take a trip to visit the grandkids, pick up the tab when you’re out with friends or pay to take the entire family on vacation. Also consider the charities you want to support. All this may take some experimentation, as you figure out how much money you’re willing to part with, without leaving yourself feeling uneasy.

5. Prepare Your Heirs. If you’re reluctant to spend your own money, soon enough your heirs or a charity will get their chance. Will they handle your money with care? This is the moment to find out.

You might identify some charities that you find meaningful and start monitoring them, paying close attention to how much of the money they raise ends up with the folks they’re trying to help. Ideally, administrative costs and fundraising should consume less than 10 cents out of every $1 raised.

Meanwhile, with your heirs, you could take advantage of the annual gift-tax exclusion, and give up to $15,000 to your children and other family members you’re looking to help. Then check to see how the money is used. Does it end up paying down debt, padding an investment account or funding education—or does it lead to fancier vacations and more lavish cars?

If you’re worried about how your intended heirs will use the money you bequeath, you could explore some sort of trust arrangement that disburses money over time or for specific purposes. But think long and hard before going this route: Trusts often prove to be excellent vehicles for transferring wealth to money management companies and trust administrators.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Humble BraggingHe Can Be Taught and Just Do It. Jonathan’s latest books: From Here to Financial Happiness and How to Think About Money.

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R Quinn
R Quinn
1 year ago

Two observations: structure your retirement money in buckets for spending and don’t hesitate to spend the money in the bucket, travel for example. Next, if appropriate, think not in terms of heirs, but surviving spouse and plan sufficient assets, insurance and income stream.

Michael Longo
Michael Longo
1 year ago

Jonathan, one of the most insightful articles you have ever written! Really resonated with me. Well done, sir!

David Baese
David Baese
1 year ago

Kristine Hayes pay attention!

medhat
medhat
1 year ago

I have a somewhat different take. A “this is the moment to reap your reward” mentality struck me a lot like the mentality (and consequent typical outcome) behind dieting, making sacrifices (in the case of saving often a longer time frame than dieting) in anticipation of someday “reverting to ‘normal’, in this case a reward for a duration of financial sacrifice by spending as you’ve always wanted to. The large body of research in dieting says that the overwhelming majority of dieters “fail”, and regain lost weight. Where I draw the analogy to saving is that, extreme withholding of indulgences and luxuries, in anticipation of someday being able to catch up, seems to have the cart well in front of the horse. I would contend that, in the earning (and saving) years, people would be better off cultivating a sense of what really matters to them, and how much that costs. Everyone defines that differently, as it should be, and for some the cost of that life is monetarily more than for others. The realism has to hit, are assets and income enough to maintain that lifestyle, including accounting for anticipated changes that might occur in retirement. Being in a profession where a good number of older colleagues accumulated assets well in excess of likely expenses, it was sobering to see that retirement didn’t bring them the satisfaction they were likely anticipating. For many of them, they mistakenly (IMO) took their income and wealth during their working years as the source of their fat contentment, where in my observation they really were reaping the benefits of the social reward and public hosanas that came with their titles. But, as a wise mentor once said, we’re all replaceable. Life, work, and history move on, leaving more than a few of these retirees holding a microphone with no speaker, and watching that has been a sobering experience. I walked away from that life almost 10 years ago, deciding that my family and I would be fine on a much more modest income, still being able to do everything we wanted on our “list”, which never included buying a Tesla or a BMW. Transitioning to a career, temporarily, with great psychic reward and very modest (non-profit) financial reward was a great reset, and would have served as a great long-term career if yet another work/passion opportunity didn’t come about, this time with both the psychic AND financial rewards, which was a nice if unnecessary bonus. Have any of these career changes affected our family spending? Nope. Learning to be happy with “enough” is a lesson I hope to pass along to my children, “keeping up with the Joneses” seems a treadmill to dissatisfaction, both during the work years as well as in retirement.

SanLouisKid
SanLouisKid
1 year ago

My wife and I were savers. With luck, our nest egg won’t actually go down in retirement (over a 30 year period). We do what we want to do and also enjoy some very inexpensive pleasures. The money we don’t use will be left to charitable organizations. We could spend a lot more money but we wouldn’t be any happier. It’s a balance that works for us.

Ginger Williams
Ginger Williams
1 year ago

I’m within five years of retirement, so I’ve started planning income streams and spending buckets.

My first goal is several income streams that, combined, will provide me with my current gross monthly income. Second is a bucket for fun money, for a couple of very long trips I’m planning when I no longer have to stick to vacation schedule. Third is my legacy bucket, investments that I don’t need to maintain my monthly income stream. My legacy bucket will be my security blanket. I don’t expect to draw on this bucket to fund my retirement, but I’ll spend it if I need it.

Why split my investments up this way? Because my fee-only financial advisor said I’m saving more than needed to continue my lifestyle. She asked if I’m putting off too much enjoyment for retirement and not enjoying life now. We worked out this three-way split to help me realize that I can slow down a bit on savings, spend a bit more on travel while I’m healthy, and still have enough for the modest lifestyle I enjoy when I retire.

ScubaSkier
ScubaSkier
1 year ago

I am one of those people that saved for retirement and now I have more than I will ever spend. But I retired 27 years ago at age 45. I lived frugally because financial advisers told me I did not have enough saved. Now I regret I did not do more when I was younger, both before and in the early years of early retirement. Now I cannot do everything I want to do but could have done years ago when I had better health. Advise from financial advisers is usually very conservative and often self serving since they make money by managing yours.

Langston Holland
Langston Holland
1 year ago

This article can serve as a compass for everything we do financially. It’s the endgame that matters most, and a good plan that includes being ruthlessly honest with yourself provides the best opportunity to smell the flowers along the way.

I am thankful to have had parents that made huge sacrifices to lead me in this path before I had the maturity to appreciate it. I am also thankful to live in a country founded by people that made huge sacrifices for my freedom to pursue it. We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

My advice to those that have the wisdom to know they could have done things better in the past: welcome to the club, forget “sunk costs” and arrange the best dinner of your life with someone that cares about you and plan the endgame. Learn how to sail and maybe circumnavigate the planet? I’m considering it.

Make no little plans; they have no magic to stir men’s blood and probably themselves will not be realized. (Daniel Burnham, architect, planner of cities, 1912)

UofODuck
UofODuck
1 year ago

I spent 42 years working for a trust company and the typical fee we charged our clients was 1.0%, which included both trust administration and investment management services. A typical asset management firm would charge more or less the same, but offer far less in administrative and banking services. What I would think long and hard about is naming an individual trustee as then the totals fees can easily double. Also, an individual trustee may mean well, but may lack the skills or experience to adequately perform their job. A trust may not be appropriate or necessary for everyone, but they can work well where it would better serve a beneficiary to distribute assets over time, rather than all at once.

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