Avoiding the New Retirement Spending Spree

For many new retirees it can be easy to go overboard having a ball checking off bucket-list items. To avoid overspending, and jeopardizing everything you worked so hard for, you need to have a realistic budget and stick to it.

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Congratulations, you’re retired! After 30 years of hard work and savings, you have over $1 million in your 401(k). Wow, that’s a lot of money, you would think.

Feeling flush with cash, however, can lead to a problem. Overspending during the first few years (opens in new tab) of retirement is one of the biggest mistakes a recent retiree can make.

Here’s what happens: After spending decades hard at work, many newly minted retirees jump into all the fun vacations and other bucket list items they had been dreaming of with both feet. I once worked with a family who took six cruises during only their first year of retirement. Another family decided to pay off their children’s college debt and put a down payment on the same child’s new house. While this is admirable, it’s not the best financial plan.

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Many retirees are used to having a cushion of $5,000 or $10,000 plus their weekly paycheck. All of a sudden, on the day they retire, hundreds of thousands, if not millions, of dollars seemingly become available. It’s like winning the lottery.

Unfortunately, the cure for overspending is to cut back and reduce spending, which can be devastating to a family used to living at a much higher standard. To resolve this problem, retirees must take an active approach to financial management.

Start with a Budget

First, it’s important to take a full inventory of income, including retirement plan distributions, Social Security and pension payments. Creating the right balance between spending and income results in a happy, stress-free retirement.

It’s not rocket science, but it bears repeating: A retiree’s monthly income should always exceed their withdrawal schedule. To effectively manage finances in retirement, retirees need to follow their withdrawal strategy and budget like a map. Financial planners (opens in new tab) recommend creating this map by examining all expenses and creating a core budget that includes essential expenses, such as housing, food, health care and transportation. The next step is to create a budget for discretionary spending that can be effectively reduced if necessary.

Fine-tune Your Withdrawal Strategy

Once a retiree gets a firm grasp of their expenses, it's time to analyze and adjust the monthly withdrawal rate from their retirement savings plan.

As a rule of thumb, at an annual withdrawal rate of 4%, retirement savings last approximately 30 years. Several factors impact how long savings last, including market returns, interest rates and significant unplanned expenses, such as health care or nursing home expenses.

Financial advisers use calculations and market knowledge to determine the best withdrawal plan for their clients and help them avoid overspending. They also provide best practices for preparing for health care and nursing home expenses through insurance plans.

Reduce and Eliminate Expenses

Reducing expenses is everyone’s least favorite part of financial planning, but when overspending becomes a problem, expedient responses are critical to prevent future financial stress. An important consideration for all retirees who find themselves overspending is the following question: Are there viable lifestyle changes that would help to save or free up money for other essential, unavoidable expenses, such as hearing aids or traveling to visit grandchildren?

Try targeting two of your biggest expenses first: housing and health care.

  • Cutting housing costs: Retirees 75 and older spend 43% of their savings (opens in new tab) on housing expenses, including property taxes, homeowner’s insurance, and other home-related expenditures, according to the Employee Benefit Research Institute. Many retirees find that downsizing their living space makes the most significant contribution to a healthier budget. Another option is to move to an area with a lower cost of living (for more on that, see 27 Cheapest Places Where You'll Really Want to Retire).
  • Cutting medical costs: USA Today (opens in new tab) reports that retirees spend an average of 11.4% of their income on health care. Medicare generally covers 80% of medical bills, leaving plenty of risk for crippling medical expenses. Also, Medicare provides no coverage for certain medical costs, such as dental care, eye exams, glasses and orthotics. To help control these costs, look into coverage through supplement plans (for more, read 8 Steps to Picking the Right Medicare Plans During Open Enrollment). Medicare supplement plans help retirees’ bottom line, as does opting for generic drugs and supplements when possible. A financial adviser specializing in retirement planning can provide many additional ways to preserve wealth through insurance and investment strategies.

Aside from housing and medical costs, food and transportation expenses can also unknowingly contribute to overspending. Simple lifestyle choices, such as eating at home one or two additional times per week, can save money on food and transportation, keeping many retirees’ finances on track. Finally, many retirees use the tried and true method of clipping grocery coupons and frequenting establishments that offer senior specials. Every little bit helps.

Choose a Trusted Financial Adviser

Monthly or annual reviews with an expert financial adviser provide the definite cure for overspending. Advisers review investment decisions and make the necessary changes to address the issue directly. They also calculate the optimal withdrawal rate and adjust it as needed. They can create spending schedules, identify methods for diversifying income sources, and plan withdrawals for optimal tax scenarios. For retirees with an overspending problem, meeting a financial adviser ensures their financial security.

Correcting an overspending problem during retirement is an urgent issue that requires budgeting, setting an optimal withdrawal rate, reducing expenses and following an effective financial plan. Financial advisers understand the causes and consequences of overspending and how to correct the problem swiftly.

Those retirees who gain assistance with overspending from financial advisers are usually surprised to find how quickly the problem can be corrected with the proper help. Ultimately, the collective goal of retirees and financial advisers is to maximize the retiree’s money and time to help them enjoy their golden years.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Mark Fried, Investment Adviser Representative
President, TFG Wealth Management

Mark Fried is a Chartered Retirement Planning Counselor, and holds a Bachelor's of Science in Computer Engineering from Columbia University and a Master's in Government from the University of Pennsylvania. Mark contributes to the digital publications of Forbes, Morningstar, Philly Burbs and The Wall Street Journal, USA Today, and the Philadelphia Inquirer. He has been a guest on Fox Business, NBC, WPHL17 and co-hosted a PBS special, How to Select a Financial Advisor. Mark is an Investment Adviser Representative and insurance professional.