How to Spend More Money in Retirement
An endless parade of financial articles talks about saving enough for retirement and minding your retirement budget. But what about having more than enough money for your lifestyle goals? Just accumulating sufficient savings to last through your entire retirement is only part of the picture.
Decumulation, the Final (Retirement) Frontier
“The decumulation of assets in retirement is obviously a much more complex problem than accumulating assets before retirement,” said Emmanuel Roman, CEO of PIMCO, in an interview with Advisor Perspectives. He continued:
“Because of its complexity, decumulation is unlikely to be solved with a single solution; we’re going to need to combine a number of good ideas from different corners of the industry to solve this problem. To make a significant difference, one should start with an important problem. A big one is how to protect retirees from sequence-of-returns risk, or the risk related to the timing of retirement.”
Roman then said that lots of research has shown “the devastation that can result from poor returns in the years just before, or just after, retirement. While episodes of poor returns may be less significant in the accumulation phase, an untimely transition to the decumulation phase risks completely derailing the retirement plan and drastically reducing the longevity of assets.”
Making the Shift from Retirement Saving to Spending
While many retirees struggle with the risk of running out of money in retirement, there is a flip-side that is just as acute. There is also the risk of underspending in retirement, which can happen after retirees have spent years putting money away and building up assets.
Spending them down may not come easily. Indeed, this shift from a saving to spending mindset can be quite the hurdle.
Some retirees want to hold onto the fruits of their life’s work for as long as possible. Others may worry about what can happen to their money if another market crash like 2008 were to happen. On the other hand, lots of retirees are simply comfortable with long-held habits of putting money away and watching their spending.
Is any of this true for you? There are steps that you can still take to balance ‘living a little’ with following habits of being frugal.
What Can You Do to Find Balance?
One way is to follow what retirement researcher and actuary Steve Vernon calls the “Spend Safely in Retirement Strategy,” which can be adapted to your situation depending on your risk tolerance, lifestyle goals, and need for income.
To generate sources of lifetime retirement income, follow these three steps, Vernon says:
- Delay taking Social Security until age 70 so you maximize income from your benefits.
- Use required minimum distributions as a guide for maintaining a safe withdrawal rate as you spend down your savings. Keep this retirement money in low-cost investment funds.
- Set aside some money in an emergency fund so you don’t have to tap into the assets that are paying you retirement income.
Maximize Your Social Security Benefits
Optimize your Social Security benefits with a careful strategy to delay your benefits as long as possible, but no later than age 70. If you retire before age 70, enable the delay by either working part-time or implementing a Social Security bridge payment.
One effective solution for creating a bridge payment between when you retire and claim Social Security at 70 is with an immediate annuity.
Say that you retired at 65 and you opted for an immediate annuity. Your payouts would start soon after you bought the contract. Then the contract would pay you a predictable monthly income for your base living expenses until you turned 70.
You could choose an annuity payout option that lasts for 5 years to ensure that the payments fit your timeline for claiming Social Security.
Use RMDs as a Guide Against Risk
According to Vernon, the second part involves having some money in low-cost investment funds. Your financial professional who holds a securities license can help you explore your options here.
Since this nest egg can go up and down in value, how can you be sure that you are withdrawing an acceptable sum for income? There is the danger of sequence risk hitting early, and you want your money to last for as long as you need it. According to Vernon, required minimum distributions can be a valuable clue-in.
He recommends using the required minimum distribution (RMD) rates set by the IRS to determine the amounts that you can safely withdraw each year to help pay for living expenses.
Use the same RMD methodology to calculate your annual withdrawal if you retire before the age the RMD applies to you (age 70 if you were born on or before June 30, 1949; age 72 for all others). The custodian for your IRA or your qualified employer plan will also most likely calculate and withdraw your RMD every year.
Following this step can give you an “income floor” for basic lifestyle expenses. Ask your financial professional about any questions that you may have about this.
Keep Some Liquidity for Emergency Situations
Set aside some money for an emergency fund, so you don’t need to withdraw from the assets that are generating your retirement income. Vernon and his team emphasize the importance of having this money in places that are liquid and easily accessible should an unexpected event or financial emergency arise.
Having these liquid funds at the ready will put less stress on your retirement nest egg. In turn, that will help your retirement money last longer and provide income for you over the long haul.
What if You Want More Income?
While the Spend Safely in Retirement Strategy holds up well (Vernon and two other experts tested it with success against 291 other income strategies), many retirees will want to go beyond the scope of having “just enough” for their lifestyles.
What if someone wants more reliable income, wishes to maximize their retirement dollars, or simply wants to feel more at peace about their monthly income streams?
Then it might be worthwhile to explore adding more sources of guaranteed income into the picture. Annuities are one such source, as they are the only vehicle that can truly pay you a guaranteed income stream for life.
In fact, the right annuity may be able to give you more “bang for your buck,” in terms of how much money you put into it compared to what you would in other income-generating assets. This is because of how the insurance company manages risk and upholds its contractual guarantees to you.
Individual investors, and other financial institutions for that matter, can’t quite duplicate how life insurers manage and control risks. This is one of the reasons why insurance companies have held strong even in economically hard times such as the Great Depression.
Set About Lifelong Goals Early
Consider the activities that have more involvement in the early years of your retirement, when you are still physically able, and spend your money on those activities then.
If you wish to travel, this might be a good time to do it. Right now you have the stamina to deal with airports, plane flights, bus rides, train schedules, and other tasks that are associated with travel.
You also will be more likely to be physically fitter now than in the years ahead. So, if excursions such as hiking, mountain-climbing, or other thrill-seeking adventures sound exciting, now may be a good time to pursue them.
Just be sure not to overspend your money on these activities so that you will have enough left for your later years. Your financial professional can help you plan for these less-frequent expenses in relation to other retirement spending in your income planning.
Don’t Forget About Healthcare Planning
Set aside dedicated funds for future healthcare spending, especially if that is a concern for you. Again, if this is a stressor for you, you might look at a supplemental Medicare plan that covers many of the expenses that Medicare doesn’t cover.
If you are under age 65 and have a high-deductible health insurance policy, you might consider opening a health savings account (HSA). Your financial professional can help you plan for healthcare expenses that you may encounter in the near term as well as years ahead. The important point is to not forget about them in your planning.
Enjoy Your Hard-Earned Retirement
While accumulating enough money for retirement is commonly addressed by financial pundits, commentators, and writers, the concept of underspending is almost never covered by any of them.
Unless you are saving money so as to leave a legacy for your heirs, then consider a sensible spending plan that uses a reasonable portion of your resources. That way you can enjoy life now, instead of missing out and hoarding your money for a rainy day that may never come.
Consult your financial advisor for more information on spending your money during retirement and how you can get the most bang for your bucks.
What if you are looking for a financial professional to assist you? No sweat, many independent financial professionals are available at SafeMoney.com to answer your questions and guide you.
Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals and explore a working relationship. Should you need a personal referral, call us at 877.476.9723.
