For most of your life, you work hard to save to set yourself up to retire. Once you leave the workforce, it’s time to enjoy the fruits of your labor. But, despite all that preparation, many people are still afraid.
The fear is real. The majority of Americans (61%) are more afraid of running out of money than they are of death, according to the 2023 Annual Retirement Study from Allianz Life Insurance Company of North America (Allianz Life).(1) And it makes sense when risks to retirement can feel seemingly insurmountable.
Retirees worry about inflation and costs increasing for basic expenses, market volatility and financial crises. It can make you feel like you can’t afford to enjoy your life.
In some cases, the worry might be warranted — and we are not advocating throwing caution to the wind. But if you have planned properly for retirement, prepared for alternative outcomes and protected your income, you may be letting your fear keep you from enjoying your retirement. This overwhelming fear can actually lead to significantly underspending in retirement.
Underspending in retirement is more common than you would think, and it can lead to a less-than-satisfying retirement lifestyle, defeating the purpose of all that planning. So how do you strike the right balance between common-sense frugality and frivolity? Here are four tips to help you loosen the purse strings and live a little!
1. Create a retirement budget now
When it comes to retirement planning, knowledge is power. The more you know about how much retirement income you will need, the greater peace of mind you will likely have.
It’s worrying that many Americans aren’t taking the necessary steps to set themselves up for a successful retirement. In the Allianz study, 40% said they don’t have a financial plan for retirement and will just figure it out when they get there. Your retirement could last for 25 to 30 years. That’s a long time to just play it by ear.
The best way to prepare yourself is to have a solid understanding of your monthly expenses. Start by tracking your income and expenses for a few months to determine how much money you’ll need in retirement to support your desired lifestyle.
You need to look at how much you need to cover your essential expenses and make sure those will be covered with guaranteed income. Those expenses will increase over time, so finding ways to increase your income is also important.
Some expenses (things like commuting and lunch at work) will decrease in retirement. There are others that may fluctuate or increase for a time depending on where your interests lie. But this will give you an idea of how much you spend now and likely how much you’ll spend in retirement. You don’t want your spending to come as a shock in retirement.
The word “budget” often comes with connotations of restricting your spending. What a good budget will do is help you get a handle on healthy money habits. Sometimes you just need to give yourself permission to spend.
If there are big-ticket items, like international trips you want to take in retirement, those should be built into your budget. That way, you eliminate the fear that you can’t afford it — you already built those expenses into your retirement budget.
2. Pay taxes now to keep more of your money later
One of the biggest mistakes investors make is overfunding their tax-deferred retirement accounts like 401(k)s. Then, when withdrawing their retirement funds for income, the tax bill comes due. It’s important to understand how much your income will be taxed and build that into your retirement income plan.
Another way to address taxes in your strategy is to watch for opportunities to reduce the amount of taxes you’ll pay on your retirement plan money. After all, a tax-diversified retirement portfolio can enable you to spend more even if your balance isn’t as big as you’d like.
Income tax-free accounts, such as Roth IRAs, health savings accounts (HSAs), life insurance policies, as well as other after-tax investments, are all important pieces of the retirement planning puzzle.
You can also move money from pre-tax accounts into Roth accounts. Roth IRA conversions can enable investors to pay taxes today (when tax rates may be lower than they will be in years to come) in order to avoid a bigger payout in the future. This provides greater control over the amount you’ll pay in taxes in retirement. A financial professional can help you decide the right strategy for your specific retirement planning needs. (You can learn more about mitigating the effects of taxes during retirement in my article Three Strategies for Reducing Tax Risks in Retirement.)
3. It’s OK to be a little selfish
While this may sound harsh, funding your retirement must come first — no matter what other expenses come along. Sacrificing your retirement savings by being overly generous with paying for college or extravagant family vacations only puts you at risk of being left with a shortfall later in retirement.
Preparing for your future should be your No. 1 priority. And, let’s face it, your children will thank you when they don’t have to support you during your golden years. So tend to yourself first when planning for retirement, and you will be in a better position to live the lifestyle you know you deserve.
4. Plan for the unexpected
No one is comfortable with the unknown. Despite the best plans, retirement can often throw us some unexpected curveballs, and this is likely a primary cause of some of that spending fear. You can’t plan for everything, but you can prepare for anything.
While this fear might not ever completely go away, and some restraint is a good thing, there are ways to balance the fear of losing with the need for growth by adding risk management strategies into your retirement plan.
You could consider a financial product that provides guaranteed lifetime income, like an annuity. This money, in addition to Social Security payments, will be the backbone of your retirement income to take care of those essential expenses mentioned earlier. Making sure you have guaranteed income with products like annuities helps ensure you will not find yourself in a bind when something unexpected pops up later on. Some annuities also have the ability to increase income through either built-in or additional cost riders to mitigate risk of inflation, too.
A life insurance policy that allows for tax-free loans or distributions may also be a way to provide protection for unexpected financial events. Or moving some of your equities into buffered exchange-traded funds (ETFs) that offer upside potential up to a stated cap, and a downside buffer can allow you to invest in the market for growth and limit exposure to risk.
Again, a financial adviser can help determine the best approach, but being ready for the unexpected will give you an added sense of calm to spend to increase your good times in retirement.
Plan today for a better tomorrow
While there are plenty of cautionary tales about overspending in retirement, underspending can also put a damper on how much enjoyment you get out of retirement. You’ve worked hard for your money, so it’s important to give yourself plenty of opportunities to reap the rewards. A little careful planning now will help you have the retirement you’ve always envisioned — and that includes spending for fun without any guilt or worry.
(1) Allianz Life conducted the online survey in February and March 2023 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous U.S. with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k.
Allianz Life Insurance Company of North America does not offer tax or legal advice.
Annuities and Life Insurance are issued by Allianz Life Insurance Company of North America and variable products are distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. This notice does not apply in the state of New York.
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company and do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.
ETFs are distributed by Foreside Fund Services LLC. Investment in ETFs involves risk including possible loss of principal. There is no guarantee the funds will achieve their investment objectives and may not be suitable for all investors.
Kelly LaVigne is vice president of advanced markets for Allianz Life Insurance Co., where he is responsible for the development of programs that assist financial professionals in serving clients with retirement, estate planning and tax-related strategies.
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