It can be difficult for financially conservative people to spend retirement savings after a lifetime of cautious saving. This is especially true when you consider that many experts believe you need over $1 million in the bank to retire comfortably.
Here are three ways to avoid an overly-frugal retirement while keeping your head above water, financially.
Spend retirement savings rationally
Finance personality Dave Ramsey stirred controversy by advocating for an 8% retirement withdrawal rate, double the traditional 4% rule. Although some of the criticism was warranted, it did highlight an interesting issue: While many people aren’t saving enough for retirement, some retirees aren’t spending as much as they could, either.
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According to the Employee Benefit Research Institute’s (EBRI) 2024 Spending in Retirement Survey, over half of retirees say their overall expenses in retirement are higher than they originally expected. However, nearly four in five say they are able to spend money how they want, within the realm of common sense.
Despite higher-than-expected costs, three in ten retirees believe their overall lifestyle is better than expected in retirement, and over two-thirds of retirees agree they have the retirement lifestyle they always envisioned. By the same token, 58% say they are still saving for the future.
While saving and spending go hand-in-hand, within reason, there’s nothing wrong with being cautious with your hard-earned savings. However, excessive caution poses its own risk: a life not fully lived, where the primary beneficiary of your savings becomes the adviser paid to manage them.
The study’s authors suggest that one major reason for the reluctance to spend is the uncertainty of retirement — the unknown duration of life, the longevity of assets, health prospects and market performance. Continuing inflation also adds to the uncertainty, although those fears are slowly easing as significantly fewer retirees (72% vs. 79% in 2023) are concerned about inflation affecting their retirement today.
Psychological research indicates that uncertainty naturally induces fear, prompting many to avoid unknowns and cling to what’s familiar. Thus, some retirees find comfort in continuing to save rather than spend.
So, while seeking financial advice and planning for retirement is helpful, these efforts don’t always address the psychological challenges of retirement. To better manage these challenges, let’s explore three effective ways to build comfort with spending in retirement.
Find out how to Spend Without Worry in Retirement
1. Accept and embrace uncertainty
Psychologists suggest that the power uncertainty has over us is of our own making. We can limit its negative impact by accepting and embracing it rather than worrying about it. Understand that no plan can completely eliminate uncertainty; it’s an inherent part of life. Acknowledge that while you can’t control every aspect of your future, you’re not rendered powerless.
The key is to focus on what is within your control. This includes adhering to a sensible withdrawal rate and maintaining a healthy lifestyle, which can significantly mitigate feelings of helplessness.
Accepting uncertainty isn’t about resignation; it’s about finding strength in adaptability and making informed choices within the scope of what you can influence. By recognizing what is within your control and accepting what you can’t control, you can better direct your attention to pursuing what brings you joy.
2. Adjust to a shift in identity
It’s true, your frugality might be a lifelong companion, as old habits notoriously die hard. However, retirement marks a profound shift in identity, steering you away from a professional persona that may have been your anchor for years. In fact, many retirees define retirement as a new chapter. This transition calls for a redefinition of self, which can significantly influence how you view and use money.
Navigating this change effectively means exploring and embracing new facets of your identity. Ask yourself: What passions have I set aside? What new pursuits excite me? As you align your spending with these newfound interests and aspirations, your financial decisions gain a deeper sense of purpose.
Emotional resilience plays a crucial role in this journey. Research says building this resilience — possibly through mindfulness, positive thinking or leaning on social networks — can help you adapt to these life changes more gracefully. Therefore, it can equip you to handle the uncertainties of retirement with greater confidence.
3. Cultivate a more positive relationship with money
Behavioral psychology reveals our tendency to prioritize negative over positive information, a phenomenon known as negativity bias. This bias significantly influences our financial decisions, often leading us to focus more on avoiding negatives than pursuing positives.
When told by an advisor there’s a 99% chance of a successful retirement, many of us fixate on the 1% risk of running out of money. A way to counter this is through positive reframing. It involves redefining money as a tool for joy and fulfillment, not just a shield against potential downsides. This shift in perspective encourages us to see money as a means to enrich life experiences.
That doesn’t only mean consumption, but rather recognizing the happiness that can come from using money purposefully, such as through charitable giving or supporting loved ones. Research suggests we gain more happiness from spending on others than on ourselves.
Assessing the value and impact of purchases, rather than just their cost, can help reshape spending habits. So, try this: after spending money, reflect on your feelings. Did the purchase bring joy or add convenience to your life? Such reflections can guide and ease future financial decisions.
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