Changing Gears from Saving to Spending in Retirement

While few working age Americans expect to receive a pension during their golden years, many are tasked with saving for their eventual retirements on their own. Knowing just how much money will be needed to retire comfortably 30, 40, or even 50 years down the line presents a seemingly impossible challenge, and uncertainty surrounding retirement saving and expenses can lead some to expect that they need far more than they actually will.

When planning for retirement, most people focus on how much they need to save, where they will live, and how they will maintain their standard of living. But one aspect of retirement planning that is often overlooked is the importance of spending money on activities that bring joy and fulfillment.

In a survey conducted by Bloomberg of investors across North America, for example, 43% of respondents indicated that it would take as much as $5 million to fund a comfortable retirement. Another 31% felt that $3 million was the magic number, while only 3% believed that anything less than $1 million was sufficient.

While most people will never accumulate $3 - $5 million during their lifetime, it is encouraging to know that many probably overestimate how much money they will truly need once they retire. The majority of people who save their way to becoming millionaires never come close to spending all of their money, even those who manage to live well into their 90s.

According to a study published by the Employee Benefit Research Institute, roughly 33% of retirees, regardless of the amount they started with, actually increased their net worth during the first two decades of retirement. The technical term for this phenomenon is frugality inertia. In essence, it means that a person who spends decades delaying gratification and developing good saving habits cannot suddenly become a spendthrift simply because they have reached their 65th birthday—or full retirement age.

In the best-selling book The Millionaire Next Door, one of the author’s most prescient findings is that while accidental millionaires tend to be high-income earners, they also conserve that income and reject poor spending habits. They tend to live in modest homes, drive older cars, and shop for bargains wherever possible. They have mastered the art of avoiding lifestyle creep—the tendency to upgrade one’s lifestyle as income increases.

The reason some high-income earners become millionaires while others spend lavishly on seemingly superficial or extravagant items is because the pain of parting with the money to make such a purchase forces them to spend less than their peers. This group is so farsighted that they cannot enjoy their money today for fear that a spontaneous indulgence will sabotage their long-term goals.

Thus, it makes perfect sense why newly minted retirees would want to be conservative with their spending. After decades of receiving a paycheck on time and in full every two weeks, it can be terrifying to think about spending money when you no longer have steady income.

What most people really want is to save enough money to stop having to worry about money. But the reality is, when your desire to preserve money becomes such an integral part of your DNA, that focus on saving is a big part of who you are.

If you develop good money habits early on, learn the importance of saving, and live below your means during your working years, congratulations; you’ve won. But just as we regularly study the cost of excessive spending in retirement, we must also consider the cost of being too frugal.

Having to invent new ways to spend your money can certainly be a problem. A first-world problem, but a problem, nonetheless. For those who have worked hard and have been disciplined for years about saving and investing, allowing yourself to spend your money can be a process fraught with emotion. But it can also be helpful to think of it as a steppingstone to creating and pursuing a happier, more meaningful life.

For instance, rather than viewing a massage as a wasteful indulgence, one could instead choose to view the experience as an investment in their overall health and well-being. Such an investment is crucial in retirement as it can help maintain quality of life and increase longevity. Additionally, investing in healthier food and preventative healthcare can help reduce future medical costs. It is important to prioritize nutrition and self-care in retirement and consider these expenses as investments in a happier and healthier future.

Another way to invest in your overall well-being is to pursue hobbies that interest you, despite the cost. Studies have shown that engaging in activities such as art, music, or learning a new language can improve mood, reduce stress, and even lower the risk of cognitive decline. Retirement offers the perfect opportunity to try new things and explore passions that you may have put off for decades. The key is to find a balance between spending responsibly and allowing yourself to indulge in activities that truly bring joy and happiness to your life.

Consider also using some of the money you’ve squirreled away to enjoy time with your family. While it may feel like a splurge to take your adult children and/or grandchildren on an all-expenses-paid trip to a destination you’ve been dreaming about for years, it is likely that you’ll find greater satisfaction creating memories and will appreciate the time spent together more than you will miss the money spent in the end.

Alternatively, you can incorporate philanthropy into your retirement plan. As you determine your budget for the upcoming year, you could also pledge to donate whatever you don’t spend to charity. For example, if your plan is to spend $100,000 this year, consider making a promise to yourself that if you fail to spend the entire amount, the remainder will go to support a cause that you care about. Over time, you will begin to see either an increase in your spending or an increase in the amount of good you end up doing for someone else. Either way, it’s a win.

For some, watching money compound provides even more pleasure than spending it. Some people probably save too much money because there are so many uncertainties involved in the retirement process—rising healthcare costs, an unpredictable stock market, inflation, etc. This could be a “chicken-or-egg” problem.

It is hard to make plans for yourself and your money that can last throughout your retirement—presumably three or more decades. But after years of hard work and sacrifice, retirees should feel entitled to enjoy their retirement and everything that comes with it. While it’s important to budget and spend money responsibly, it’s equally important to remember that retirement is meant to be enjoyed. Whether taking a trip with loved ones, trying a new restaurant, or indulging in a new hobby, retirees should feel empowered to make choices that enhance their quality of life.

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Malcolm Ethridge, CFP® is the Managing Partner of Capital Area Planning Group based in Washington, DC. He is also the Managing Partner of Capital Area Tax Consultants. 

Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits. 

 Disclosures:

The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.

Investments in securities and insurance products are:

NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE