Transitioning From A Saver To A Spender In Retirement

Studies suggest that it takes 21 days to form a habit. This is why financial advisors often ask their clients to steadily save for at least a month to get into the habit of saving regularly. As hard as it is to build habits, it is equally tough to get rid of them. When people spend a better part of their lives saving, investing, spending frugally, and accumulating wealth, it is hard for them to transition into a spender when they finally reach retirement. The money that one earns in their lifetime is kept aside for use in retirement. But shedding the personality of a saver and becoming a spender overnight is not something many retirees know how to deal with.

Here are some essential things that you should know about the retirement mindset shift from a saver to a spender.

Why do retirees find it hard to transition?

When somebody is taught to do something their entire life, they start believing in it as the absolute truth. Most financial advice given to individuals by their parents, mentors, advisors, etc., centers on creating wealth. Whether it is investing in a stock, diversifying the portfolio, buying real estate, or even precious metals like gold, the final aim is to see the money grow. However, when a person is retired, they have a pool of their life’s earnings with a limited time to spend it. Depending on how much one saves, some people can be left with more money than they truly need. To then spend these funds, without having to worry about the future can ignite feelings of fear, guilt, uneasiness, and stress in some people.

Here are some ways to combat these feelings and become a spender:

1. Make a budget

Budgeting is one of the founding principles of financial planning. It is not only an exercise for those who want to curb their expenses. It is also effective for those who want to spend their money. It gives individuals a clear picture of their credit and debit statements. This takes away the element of uncertainty and keeps one in control of their money. Another benefit of budgeting is that it keeps people in touch with their changing net worth.

2. Prioritize withdrawals

When one reaches the full retirement age, they are qualified to withdraw their contributions from retirement accounts. However, depending on the types of accounts, withdrawing all the funds at once can increase a person’s tax liability. It can also deplete all their savings sooner than expected. A wise way to spend money in retirement is to plan withdrawals from each instrument. For instance, delaying Social Security can substantially increase the overall benefits. Individuals can also delay required minimum distributions (RMDs) till the age of 70 ½ while depending on dividends and interests earned from certificate of deposits (CDs), mutual funds, bonds etc. These strategies help form a safety net to fall back on for the future years.

3. Track the income

When a person is earning, their sources of income are limited. Generally, one earns from their job or a side venture. This makes it easier to keep track of the money that comes in. In retirement, the avenues of income can increase. Right from pension accounts, like the individual retirement account and annuities to interest earned from investments, it can be hard to account for all these sources. It helps to segregate these accounts. Keep the earnings from some sources as the primary income and the others as the secondary income. This helps create a system with guidelines. The primary income could be used for day to day expenses while the secondary income can serve as a back-up plan for emergencies.

4. Do not ignore responsibilities

After working hard and saving for many years, sometimes people enter retirement with a sense of rebellion. Retirement is seen as a time with very little responsibilities. There are no deadlines, and one can do the things they never had time to take up before. This can sidetrack many people and slowly eat away their savings. It is crucial to understand that even in retirement, one has many duties towards their children and grandchildren. Regardless of how much wealth a person creates or how successful they are, their future generation may not follow in their footsteps. Therefore, it is necessary to safeguard their financial interests. Establishing an estate plan can ensure that one’s heirs do not suffer and the money is stored up safely in the form of assets for future use.

 5. Set a timeline

A person’s expenses are likely to change with age. For individuals who retire early under the ‘financial independence retire early’ philosophy, also known as FIRE, the first few years of retirement can be the most expensive. They are likely to take up travel, buy costly possessions like cars etc. and use up a considerable portion of their savings to compensate for the lost years of leisure. However, with time as a person reaches the ages of 70-75, their wants could reduce. The fascination with material things may decrease and people may instead spend more on medical costs, day care facilities, health equipment etc. Making a realistic timeline of how one plans to spend their post retirement years can help retirees devise a competent spending plan.

6. Never stop investing

It is vital for retirees to understand that sometimes despite all their plans and strategies, life may not go as planned. Responsibilities of their children or one bad decision to invest in a friend’s business can rob them off their wealth. Life rarely turns out as envisioned but no matter what happens, having a plan always helps. Even after retirement, people should not quit investing or finding ways to grow their net worth. Picking low risk investments can offer investors the flexibility to steer away from their plans if required and move on in life with considerable security and stability.

To sum it up

It is common and understandable for a person to fear running out of their money in retirement. The financial anxiety that comes with retirement has troubled many individuals. But as long as one stays focused as before and knows how to prioritize, they can live their retired life in peace and tranquillity. Remember to never be extreme with both – saving and spending. Finding the equilibrium will ensure a steady journey ahead.

For tips on how to embrace retirement with the right attitude, you may consult financial advisor.