Ramit Sethi Tells Us the Biggest Retirement Mistake You Can Make

(Image credit: Courtesy of MasterClass)

Editor's note: This article is part of an ongoing series in which we ask influential personal finance figures to share their opinion on the biggest retirement mistake you can make. Other articles feature Suze Orman, Dave Ramsey and Grant Cardone.

Saving for retirement is only half the battle; spending what you saved wins the war. But for a surprising number of retirees, letting go of that hard-earned cash is easier said than done.

This pervasive reluctance, according to MasterClass instructor, author and behavioral finance expert Ramit Sethi, is the single greatest mistake people make in retirement.

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“They save for decades, then are afraid to spend their money,” Sethi told Kiplinger in an exclusive interview. “If you haven’t built the skill of spending money meaningfully … it’s very possible to spend your entire life simply worrying about money.”

Keep it simple

Sethi holds the belief that people should automate their savings and investments and not restrict their small purchases. Sethi wrote the New York Times best-selling book “I Will Teach You To Be Rich,” which was turned into a Netflix series of the same name.

One thing he consistently emphasizes is that retirees should spend the money they’ve worked so hard to amass; otherwise, what’s the point?

“I’ve talked to retirees with $2 million in the bank who still drive five extra miles to save money on gas. They’re often terrified to spend a dime because they’ve internalized 40 years of restriction,” says Sethi.

“Don’t go out to eat. Don’t take that trip. Save every penny ‘just in case.’ But when is the ‘right time’ to spend? At 90? In a hospital bed?”

The fear is real

Spending money in retirement is a challenge for many retirees who, for decades, worked diligently to accumulate savings to live off when they retired.

Fears of outliving their money can cause some retirees to experience spending paralysis, which is understandable. Thanks to advances in health care and healthier lifestyles, retirement can easily last 30 years.

The good news is that several retirement spending strategies exist to help retirees determine how much to withdraw during their golden years. The 4% rule is a popular one.

The rule calls for withdrawing 4% of your savings in the first year of retirement, then adjusting that withdrawal amount for inflation each subsequent year to ensure the money lasts for 30 years.

There's the bucket rule of spending, in which you spread out your retirement savings across three buckets: short-term, medium-term and long-term needs. The rule helps you remain disciplined and worry less because you know where your money is and how much you have to spend.

Other spending strategies include the "Pay Yourself," "Me-First" and "Permission-to-Spend" rules.

Still won't budge

Despite these rules and many other spending strategies, retirees are still reluctant to spend.

“People think if you just show retirees a 4% withdrawal rate and tell them you’re good, they’ll start spending. That’s not how it works. A chart doesn’t solve an emotional problem,” said Sethi. “You have to work on the psychology of money, and for many, that means unlearning decades of fear-based advice.”

Sethi advises retirees to start small by taking a guilt-free weekend trip. Or if that feels like too much, try his "$100 Challenge."

With the challenge, you spend $100 on something you love. “It can’t be for your kids, grandkids or dogs. It has to be for you, so you build a connection between money and joy. That’s how you start rewiring your mindset,” he says.

Don’t sweat the small stuff

Ultimately, the main challenge for retirees is not a lack of a plan but the fear of spending, and that’s particularly true when it comes to those smaller, everyday purchases.

Sethi said if he had to choose a runner-up retirement mistake, it would be an obsession with the small money decisions rather than the big ones.

“The financial industry has trained people to ask $3 questions, like should I cut back on coffee, instead of $30,000 questions, like should I negotiate my salary, or is my adviser charging me 1% AUM (assets under management), which costs me tens of thousands of dollars,” said Sethi.

But in retirement, it's the $30,000 questions that matter, he said. “Where do I want to live? How much do I want to spend on travel? Should I be working with someone who helps me enjoy my money, not just hoard it?”

Donna Fuscaldo is the retirement writer at Kiplinger.com. A writer and editor focused on retirement savings, planning, travel and lifestyle, Donna brings over two decades of experience working with publications including AARP, The Wall Street Journal, Forbes, Investopedia and HerMoney.