#1 Retirement Challenge: Transitioning from Saver to Spender
Are you contemplating your last paycheck? Is retirement right around the corner? If so, you have to be prepared both financially and mentally to go from being a saver to a spender. For the last 40-45 years or so you have been a saver. Either through your employer 401K plan, your own investments, or through a combination, you have been putting a little bit of money away for a long period of time. You have trained your mind and wallet to save, save, save. The idea that you will now stop saving and start spending is not an easy transition. Here are some tips to help you smooth the path a little and help make the transition easier.
Budget- Calculate your monthly expenses and put them into two categories: essential and non-essential. Some essential expenses include food, transportation, housing, and healthcare, among others. Some non-essential expenses may include eating out, entertainment, and gifts. Don’t forget to include expenses that are only due quarterly or annually such as insurance, property taxes, and income taxes. Then convert them to monthly amounts for budgeting purposes. Once you know your essential expenses, subtract your known income sources such as social security, pensions, and other income sources (not including income from your investments). Once you have done this, you may find you have a deficit. This deficit is the amount you will need to take monthly from your investment accounts. Set up a monthly direct deposit for the essential expenses and only include non-essential expenses if you do not exceed certain withdrawal percentages discussed in “live within your means” (see below). To help you with the budget process you may us this calculator as a planning tool.
Time your deposits- For most people, social security will be a significant portion of their retirement income. Depending on your date of birth, social security will deposit your check on either the second Wednesday (birth dates that fall from the 1st-10th), third Wednesday (birth dates that fall from the 11th-20th), or fourth Wednesday (birth dates that fall from the 21st – 31st). As these dates are set by the Social Security Administration and cannot be changed, time your monthly distribution from your investment accounts to fall either a week or two before or after the Social Security deposit. This way, you will still have deposits of income coming in every 2 weeks or so, similar to the way paychecks are deposited when actively working. This may help take some of the anxiety out of no longer having a regular paycheck. Live within your means- Probably one of the most important considerations in retirement planning is living within your means. If you have to take too much money out of your retirement plan to meet essential expenses, you run the risk of running out of money later in life. What is too much money? Generally speaking, if you have to take out more than 4% of your investments in a year, you are running the risk of outliving your assets. When inflation is factored in, it is generally recommended that you withdraw 4% or less each year from your investment accounts. If you need less, take less. If you need more, consider working a little longer before retiring, taking a part-time job or cutting your budget if possible. If you can comfortably meet your essential expenses by withdrawing less than 4% per year, then you may consider taking out enough to cover non-essential expenses as well.
Invest like a spender not a saver- When you are in the accumulation phase of your life, you may have had a portfolio that was geared towards growth, but when you are in the withdrawal phase, your portfolio should reflect that. Generally speaking, a portfolio during the withdrawal phase would be more conservative with more cash, or cash equivalents, than in the accumulation phase. This may mean that you have less stocks or equity type investments and more bonds or fixed income investments in retirement than you did when you were working. While potential growth may be limited, the risk of loss is decreased generally with more conservative investments. When you have 10 or more years to retire, you can wait out or tolerate significant stock market declines as you have time on your side. If you are near or at retirement and are taking money out of your portfolio and the market is down, you may not be able to recover as you do not have time on your side. It is important to consider a more conservative approach in retirement than trying to grow your assets as you did while saving for retirement.
Transitioning from a saver to a spender can cause a lot of anxiety. It’s normal to feel this way as 40 or more years of doing the same thing is not an easy adjustment. Following these tips and working with a qualified advisor may help ease the transition. If these circumstances apply to you and you would like further advice and assistance, please send me a message or schedule a complimentary phone call to further discuss the best plans for your future.