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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