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How to Spend in Retirement and Still Sleep at Night

Retirees who have a financial plan feel more at ease about opening their wallets.

My December column, Learning to Live Without a Paycheck, struck a nerve with readers. Jim Barthen, who retired two years ago, writes that he was “truly on edge” the first time he didn’t receive a paycheck. “It’s really an adjustment, and the statement that the spending barrier is mostly psychological is so true.”

A number of you felt uneasy about the observation that retirees may be worrying too much about preserving their money. “It seemed like your column was implying that retirees can’t enjoy retirement without spending down all of their money,” writes David Greene. “To me, this sounds like the ‘keep up with the Joneses’ mentality.”

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Don’t worry, Mr. Greene. We would never advise that retirees fritter away their savings. That’s your safety net to protect against catastrophic medical and other expenses. But it does appear that retirees are often reluctant to spend some of their money—for reasons that are as much psychological as financial.

Another reader, Gerald Johnson, offers a potential solution. “One’s annual expenses, including discretionary pleasures, require a budget,” he writes. “That gives you the ability to live the life you desire.”

Mr. Johnson is onto something. “Just having a financial plan in place means that people are more likely to spend some of their assets,” says Jamie Hopkins, retirement income program director at the American College of Financial Services. Retirees who have a guaranteed stream of income “actually have happier retirements,” he says.

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What you can do. Lori Lucas, CEO of the Employee Benefit Research Institute, thinks it would “help people spend more optimally” if the financial services industry created more insurance-type products to protect against long-term risks or came up with a systematic withdrawal program.

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In the meantime, you already have access to some products designed to ease your mind. Even without a pension, for example, you could create a steady income by buying an immediate fixed annuity. You give the insurance company a lump sum in exchange for a monthly check, usually for life; you can even buy an annuity with survivor benefits for your spouse (see Income for Life).

Another option is a deferred-income annuity, often referred to as longevity insurance. You purchase the annuity when you’re in your fifties or sixties, but the payments don’t start for at least 10 years—so you know you’ll have guaranteed income in the future.

Not keen on annuities? Many insurers now offer combination policies that give you early access to a portion of your life insurance death benefit if you need long-term care (see What to Do When Your Term Life Insurance is Expiring). Reader Glen Davis used a different insurance strategy to protect his savings. “I recently purchased an additional $100,000 in permanent life insurance to help restore assets that may be spent on long-term care for me,” he writes.

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And long-term-care insurance itself is still an option. These policies have become more expensive, but there are ways to cut the cost—for example, by buying less inflation protection or shortening the coverage period. Couples can purchase a pool of benefits that can be used by either spouse. (My husband and I have long-term-care insurance with shared benefits. Our mothers each lived to be 90, so the coverage certainly makes me feel more secure.)

The point is to take whatever measures you can to hedge medical and other risks so you feel more comfortable about enjoying yourself while you can—whether that means treating yourself to dinners out with your spouse or taking that dream trip on your bucket list. “Nearly four months ago, I indulged and bought a Lincoln,” writes G.F. Hans. “I was financially able to make the purchase, but it was difficult mentally. My previous vehicle was a Honda, but I love my Lincoln and am happy I bought it.”

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