Sitting on a 401(k) Fortune? Why You Should Stop Fearing and Start Spending
Many 401(k) millionaires fear running out of money in retirement. But they don't have to if they follow these six strategies.
Bill Van Sant has seen it many times among those he has helped with retirement planning. As executive vice president & chief wealth management officer at C&N Bank, Van Sant works with retirees sitting on piles of cash who are afraid to spend it.
One client kept pouring money into an old car even though he could afford a newer one. Other clients planned to travel in retirement but kept putting it off out of fear they would outlive their savings, only to suffer an illness or medical condition that prevented them from realizing their dream.
Even Van Sant's father keeps delaying the purchase of a newer boat with a bathroom, even though he has the resources to upgrade to a new craft. The road is paved with tales of retirees who were too frugal. They had the means to splurge but were reluctant to do so.
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How to overcome being too frugal in retirement
Having a lot of money that you're reluctant to spend isn’t a bad thing, but if it prevents you from enjoying your retirement, it can be.
That’s why financial advisers say part of their job is to help their clients overcome that reluctance. Here are six ways to get more comfortable with an appropriate retirement spending level.
1. Shift your mindset
Changing the way you think can go a long way toward getting out of a frugal mode.
“The whole point of saving is so you can draw down to supplement or completely take care of your expenses when you are no longer working,” says Elizabeth Zelinka Parsons, a retirement transition expert and author of Encore: A High Achiever's Guide to Thriving in Retirement. “There has to be a mind shift, a recognition that you are saving all this money so you will be able to use it.”
One way to shift that mindset, says Parsons, is to find purpose in the money being spent in retirement. Just as saving during your working years has a purpose — to support you in retirement — so can spending.
“Money in the bank doesn’t have a lot of meaning beyond security,” says Parsons. “Did you save so you can travel? Did you save it to help your kids buy their first home? Connecting the money to purpose is very helpful.”
2. Be intentional about how much you want to spend
The thought of running out of money in retirement can be scary, especially since it can easily last 30 years.
To overcome those concerns, Eric Herzog, a financial adviser at Prime Capital Financial, says it’s important for people to look at retirement as climbing a mountain.
During your working years, you invest and build wealth until you reach the summit — the moment you have enough to retire. At that peak, the journey shifts from climbing to descending as you begin spending down your assets.
While that downward trek can feel challenging, showing retirees it's okay to spend gives them the permission they need to enjoy their savings
“We do a lot of educating on the front end to help them understand the probability of the financial plan working out and what the success rate looks like,” says Herzog. “The best advice I give them is to be clear about the amount of money they are willing to draw down and to identify the amount of money they want to leave to family, charity or whoever it may be at death.”
It might be uncomfortable to think about, but Herzog says it gives people peace of mind to spend what’s left on living the lifestyle they envisioned in retirement.
3. Create a retirement withdrawal strategy
Savings, done. Now you must determine how you'll withdraw your money in retirement. There are taxes and required minimum distributions to consider.
You might have multiple accounts — an IRA, 401(k), brokerage account and/or a Roth — which means you must figure out which one to withdraw from first.
The good news is that there are several strategies you can employ to help. The "guardrails rule" of retirement spending is one example. Unlike the 4% rule, in which you spend a fixed amount each year, adjusted for inflation, this approach is more dynamic. It helps people feel comfortable spending more, without going overboard.
Another popular strategy is the Me-First or flooring rule of retirement spending. By ensuring your essential expenses are fully covered first, this approach provides peace of mind and frees you to spend guilt-free on everything else. The Permission-to-Spend, Pay Yourself, and The Die With Zero rules are other withdrawal strategies you can use.
Withdrawal Strategy |
How it works |
Primary Benefit |
Guardrails Rule |
Increases or cuts spending based on market performance. |
Maximizes spending in bull markets and protects spending during downturns. |
Flooring (Me-First) |
Pairs guaranteed income such as Social Security, pensions and annuities to essential expenses to ensure they are covered. |
Creates a safety net and guilt-free discretionary spending. |
Permission Budgeting |
Allocates a line item in the budget for lifestyle expenditures such as vacations, hobbies or upgrades. |
Removes guilt and decision-making when spending on bucket-list items. |
4. Test out the scenarios
Fear can be paralyzing. A few tough months in the stock market can have retirees hunkering down and reigning in their spending. But fear shouldn’t be a reason to stop traveling, pursuing hobbies or otherwise enjoying your golden years.
To overcome that fear, Parsons says it's prudent to test out your retirement plan to ensure it can withstand all the what-ifs:
- Where are you if the markets tank?
- Where are you if the markets are choppy?
- Where are you if returns are much lower?
If you are still OK, Parsons says you can continue to spend as you planned. “You’ve already built that risk into the portfolio,” she says.
If you're not OK, it's time to rework your financial plan. A sound plan should be able to withstand short-term moves in the stock market.
5. Create a 'permission to spend' budget
To overcome any guilt or worries about spending too much money in retirement, Parsons suggests creating a "permission budget."
If your goal is to travel the world in retirement or help your adult child purchase a house, add that to your budget. By creating a line item for those expenditures, you're permitting yourself to spend it.
You wouldn't beat yourself up for paying your monthly mortgage or buying groceries; the same should go for your retirement goals.
“You don’t have to agonize over it. You’ve already built it into the game plan. Otherwise, you may find yourself holding back and not taking that trip or doing what you want to,” she says.
6. Remember, retirement is a journey
During our working years, we're told we need to save X amount to maintain our lifestyle in retirement, but people forget that our lifestyle tends to change over the course of retirement.
During the early years, known as the "go-go phase," people are healthy and still young enough to pursue hobbies and travel, which requires money.
As we age, we move into the "slow-go phase," where our activities and spending slow down. In the no-go years, retirees are typically the least active; barring any unplanned illness or injury that requires long-term care, they spend the least money.
You don’t want to miss the go-go days by trying to save money and not be able to enjoy your retirement when you're ready to spend. That can result in regrets you can’t take back.
“As we get older, the thing that is scarcest for us is time, not money,” says Parsons. “Assuming people have enough money, it's better to use your resources to do things you want to do.”
Take baby steps
Shifting from a saver to a spender won't happen overnight, nor should it. You spent decades amassing your retirement nest egg; nobody expects you to start spending it with abandon.
To get started, take baby steps. Splurge on an extra dinner out this month and see how it feels. Upgrade to a luxury suite or extend your trip the next time you travel. Once you spend a little more and see that your finances are OK, you’ll feel more confident doing it again.
You worked hard, saved and planned. Now it’s your time to put those dollars to work — so go ahead and spend.
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