For decades you have been working and saving for this very moment: retirement.
While you may be willing to stop working full-time, now comes the hard part: actually putting your savings to use since you’re no longer bringing in the paycheck that covered your previous monthly expenses.
The psychological shift from saver to donor — let alone nest egg manager — is no easy task for most people.
“Now you have this lump sum and you have to deduct it. For some, it’s almost physically painful,” said David John, senior strategic policy advisor at the AARP Public Policy Institute.
But unpredictable Factors like market performance, life expectancy and health issues make spending your money easier said than done, John said. That’s why people hesitate to tap into their savings because they think, “I have X dollars and it has to last my whole life, but I have a very uncertain future.” So if I touch that, I’m putting myself in danger.”
And research shows that among retirees with savings, many don’t withdraw very much, choosing instead to live off fixed sources of money like Social Security or pensions or income from part-time jobs that they take on. A Black Rock study found that after two decades of retirement, the vast majority of retirees still have at least 80% of their savings.
That’s no doubt partly because they endured one of the longest bull markets in history from 2009-2020, which helped replenish some of what they’d drained over the years. And they belong to the last generation of workers to benefit from company pension schemes.
But the psychological reluctance to tap into one’s savings is a factor for most people, regardless of their financial means. And it could become even more acute for prospective retirees as they face inflation, volatile markets and a shortage of pensions, John said.
Certified financial planner Kyle Newell reminds clients that the savings they’ve worked so hard to build are there to help them live well in retirement.
“I tell them, now the money does the work [so] You do not have to. That seems to be helping people,” said Newell, who does forecasting for his clients to help them see if they can afford to spend a little more than they might think.
CFP David Edmisten asks a simple question for clients who are fixated on having the same amount of money or more when they die: Why does it matter to you?
“I try to ask them what the purpose of money is: to have it? Or to use it as a tool to do what you want and avoid what you don’t want?”
He also asks them to think about what they really want to achieve and to use their savings as a means to that end. “A lot more time needs to be spent thinking about the meaning of retirement. Those who know what their purpose is and what they want to do report that they are happier,” Edmisten said.
And he also advises clients to take it easy on themselves and treat the first year of retirement as a learning experience about spending.
They’re trying to figure out who they are now that their prime career is over and 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.”
It’s difficult to manage your money well in retirement unless you’re realistic about what’s on the table.
The first thing you need to do is create a budget and outline a plan to cover your expenses.
“You really need to know, ‘What are my assets and my spending habits and how do I balance the two?'” John said.
So, before you retire, keep an eye on your expenses and regular expenses like housing, food, health care, etc. Then evaluate how those expenses might change in retirement (e.g., being eligible for Medicare or having your insurance costs subsidized by your old employer).
Also consider expected one-off expenses such as For example, paying for a child’s wedding, buying a car, or taking a longer vacation.
Then estimate what fixed income you will have (e.g. social security or pension payments).
The difference between your expected expenses and your fixed income is the amount you need to pull out of your savings.
Once you have that number, build a cash bucket that can cover your needs for a year or two so you’re not forced to sell if the market goes down or you retreat into a bear market.
“A year before you retire, you should have 12 to 24 months of cash,” Edmisten said. “If we go into a recession, we should never have to sell a stock to meet spending needs when the market is down.”
It would help too consult a professional. A fee-based financial trustee can help you strategize how to manage and use your money for years to come, John said.
Those nearing retirement “often get the limelight like deer,” said Edmisten, whose clients are primarily between the ages of 58 and 63 and plan to live off their portfolios on Social Security for a time, and Medicare step in. “The one common sentiment I hear the most is that my clients say they’re overwhelmed with all the decisions they have to make to live on their savings in retirement,” he said.
“With the different types of accounts many have, the potential for penalties and higher taxes if withdrawals are made incorrectly, and clarifying how their investments may need to be reallocated for retirement income, it can be very difficult for a new retiree to to find your way around.”