Making the transition from working to retirement is often not as easy as it might seem especially when it comes to managing financial assets. A reader recently, rather astutely, addressed this issue with these comments:
“One of the interesting shifts that occur as we get older has to do with enjoying the present and focusing less on a diminished future. People who have fairly substantial resources in retirement are in that position because they have been careful for a lifetime and have developed a habit of accumulating money rather than spending it. But when you realize you have enough to live comfortably the rest of your life and don’t need to keep accumulating more wealth, you have a lifetime of habits to overcome. Could you discuss the topic of ‘How much is enough’ and offer some ideas about how money can be used for enjoyment that might appeal to those of us who still buy louis vuitton bags on sale online?” H.M.
First, I suspect this reader with his money-saving habits exemplifies many folks who have accumulated enough money to support a retirement lifestyle at least equal to their pre-retirement lifestyle. Most people who have made it on their own have naturally adopted the ‘Millionaire Next Door’ mindset that has served them well during their working and accumulation years. Making the transition from wealth accumulation to drawing upon those resources for retirement is a challenge for many people. In my experience, there is often a fear, either conscious or subconscious, that you’ll run out of money. The most-often quote I hear from retirees is, “I don’t want to be a financial burden on my children.” As a result, many retirees fail to fully enjoy the fruits of their lifetime of labor. Here are some thoughts to help retirees get the most out of their retirement years:
- Start with a ‘bucket list’. Make a list of all the things you’d like to do if you had the money. At this point, don’t worry about whether you actually could afford to do something. This exercise helps you ‘flip the (mental) switch’ from earning a living and saving to enjoying your retirement years. I was meeting with a gentleman in his 70’s earlier this week who had sky dived and was planning a ride to the edge of space in a Russian MiG (price tag: $9,800)! He’s having a blast in retirement with good planning and a modest budget.
- Run a retirement cash flow analysis. Fear comes from the unknown. If you don’t know your retirement income and expenses, you’re more likely to be afraid that you’ll run out of money. Start by making a list of all of your annual fixed sources of income such as Social Security and pensions; then list your various ‘buckets’ of money such as retirement accounts, money market accounts, CDs, personal investment accounts and bonds. Next, list your known recurring expenses such as mortgage payment or rent, utilities, insurance, and food costs; then list your desired discretionary expenses such as vacations, gifts to family or charities or home remodeling. Do these projections for several years into the future. Now, simple math will give you a picture of how your income and projected expenses match up. In most cases, this analysis will indicate the need or desire to systematically take money from your capital buckets to supplement your fixed income sources.
- Decide on an appropriate annual withdrawal rate (or dollar amount) from your capital buckets. As a general rule a 4% withdrawal rate is appropriate for retirees in their 60’s; 5% for retirees in their 70’s; and 6%-7% for retirees in their 80’s or older. For example, if you’re in your sixties and have a total of $200,000 in your combined capital buckets, you could withdraw $10,000 per year. If you’re in your eighties, you could safely withdraw up to $14,000 per year.
- Buy long-term care insurance. Even if you can afford to self-insure, I find that having the insurance as ‘back-up’ gives retirees a sense of freedom to spend their other resources knowing that their insurance will help cover special healthcare needs should it become necessary.
- Develop a 12-month spending plan. It’s a lot easier to plan out twelve months than twenty years. Include some discretionary ‘fun’ items from your bucket list. Twelve months from now do a spending plan for the next twelve months based on an update and review of your cash flow analysis.
Avoid the trap of being unwilling to spend on yourself so that you can ‘leave it all to your children”. In many cases the inheritance is under appreciated and the money gone in a few short years. As a final note to our reader, “There’s nothing wrong with continuing to wash out your plastic bags!”