A lot of retirees worry about outliving their money. And rightfully so! But that can also lead to underspending in retirement. Or, not spending as much as you can afford to.
You spent your whole life working and saving money. Now it’s time to retire, and you have to transition to living off of your savings. How much should you pull each month? How long is that sustainable for? And, what if, you want to spend more now and then rachet it down later in life?
Retirement planning is a balance between enjoying yourself as much as possible without sacrificing your long-term comfort.
In this week’s video, Casey talks about what folks can do to avoid underspending in retirement.
How You Can Avoid Underspending in Retirement – Links
- Moving From Saver to Spender – Mullooly Asset Management Podcast
- The Psychology on Retirement Income: Moving From Saver to Spender
- University of Michigan Retirement Spending Study
How You Can Avoid Underspending in Retirement – Transcript
**Click here for a downloadable PDF version of this transcript**
In this week’s video, we’re going to talk about how not to underspend in retirement.
A lot of retirees worry about overspending in retirement, but a lot of retirees don’t even think about underspending in retirement. So what is a sustainable amount that you can spend each year? How can you spend freely but not recklessly? How do you map out your spending so that you arrive at the end with enough to support yourself, but not so much that you’ll regret missed opportunities?
The answer has two parts. The first is the nuts and bolts side of things. This is the mathy answer. This is the retirement planning process that we help folks with every day here at Mullooly Asset Management.
In this process, we usually identify two buckets of retirement income. There’s guaranteed income, which comes from things like social security. That’s usually, in most cases, a definite. Social security is a definite.
And then there’s things like pensions, which are less common and income from annuities. So that would be someone used the lump sum of their money and bought an income stream that’s going to last for the rest of their life.
So these guaranteed income sources are great because they put a floor in place and they give you a minimum amount that you are able to spend each year.
The second bucket is the non-guaranteed income sources. This is usually your investment accounts, your retirement accounts, your IRAs, your Roth IRAs, your brokerage assets, and this is where that sustainability question comes in.
How much can you pull from these accounts each year? This depends on a couple different factors. The most important of which is what do you plan on spending? What are your expenses going to be?
The next couple of factors are how much you have saved in these investment accounts, what your asset base is at the start of your retirement. Next is what are your investments going to earn on average? And the last one is inflation. We know that inflation things are going to cost more in the future? So this is something that we have to bake into the cake.
A good place to start is to take your expenses now, or how much you plan on spending in your first couple years of retirement and seeing how much of those expenses will be covered by the guaranteed income sources.
How much is going to be covered by social security, pension? If you have annuities, how much of those expenses is going to be covered by guaranteed income? And what’s the shortfall? Because that’s the amount that you’re going to have to draw from your investment accounts each year.
The second part of not underspending in retirement is psychological. It’s mindset. Retirees were in the saver-worker mindset for 40, 50 years, depending on when you retire. While people worked, it felt like they were earning their paychecks.
They were earning their paychecks, which allowed them to justify spending it or saving it or doing whatever they want with it. But now, when that paycheck’s not coming in every couple of weeks, and the pool of assets to live on is finite for the rest of your life, it can be difficult for people to justify spending that money.
So one thing that might help is to do the work and to map out how much exactly can be spent each month or each year without sacrificing that long-term comfort. We go through that retirement planning process all the time with folks here, and we can see the confidence that it gives them to know an appropriate amount that they can spend each year from their assets.
Like I said before, it’s a balance between enjoying life while you still can, and using those dollars to maximize your time, and also not sacrificing your long-term nest egg. It’s a fine balance that is going to unfold over hopefully a 30 or 40-year retirement.
So that is the message for this week’s episode. Don’t underspend in retirement. Don’t leave at the chance. If you need help, get in touch with us here. Thanks for watching.
