Navigating the Shift from Saving to Spending During Retirement

Planning for retirement entails numerous challenges, ranging from concerns about the adequacy of savings to investment strategies and the well-being of loved ones in the event of unforeseen circumstances. One aspect that might not have crossed your mind is the psychological shift from saving to spending during retirement.

It’s noteworthy that many retirees encounter difficulties in utilizing their retirement assets. This hesitation can stem from fears of outliving their savings, taxes, inflation, anxieties about the absence of a regular paycheck, or stress related to potential fluctuations in the value of their accounts.

Regardless of the specific concerns prompting your apprehension, the following tips can guide you in navigating the successful transition from saving for retirement to the judicious spending of your accumulated assets.

1. Change your mindset

Individuals’ adept at saving often struggle with the transition to spending once they retire. If this resonates with you, a crucial initial step upon retirement is to make a mental shift from a focus on saving to one centered on spending. This adjustment doesn’t imply depleting all your assets hastily; rather, it involves becoming comfortable with the strategic withdrawal of funds from your retirement accounts.

Engaging a qualified financial planner can prove invaluable in crafting a personalized drawdown strategy. This strategy aims to sustain your retirement lifestyle and daily living expenses while ensuring the preservation of sufficient assets for your lifetime. Having a well-designed strategy in place can instill the confidence needed to initiate the process of spending your retirement savings wisely.

2. Focus on your priorities

A highly effective approach to mentally embrace spending your retirement savings is to concentrate on your priorities. Reaffirm the reasons behind those years of diligent saving and recognize that this is the moment you’ve envisioned and prepared for. Utilize your savings to transform your dreams into reality, aligning your spending with the aspirations that motivated your dedicated savings efforts.

3. Have a plan in place

To bolster confidence in spending money during retirement, having a well-structured plan is instrumental. Retirees commonly employ three primary strategies to establish a consistent monthly stream of retirement income.

• Systematic Withdrawal Strategy – This strategy involves a systematic withdrawal from investable assets, determined by a prudent withdrawal rate. For instance, you might opt for an initial withdrawal of 4% from your retirement savings in the first year of retirement, adjusting this amount annually to accommodate inflation and sustain your spending power. The specific withdrawal percentage will be contingent on factors such as the extent of your savings, lifestyle objectives, life expectancy, legacy goals, and other individual considerations. The critical element in this approach is the maintenance of a diversified investment portfolio. Although stocks tend to exhibit more volatility than bonds, they offer growth potential essential for keeping pace with inflation. Conversely, an allocation to bonds or other conservative investments serves to safeguard your funds during periods of market turbulence.

• Traditional Approach – In this approach, withdrawals are made sequentially from one account at a time. Generally, the sequence starts with taxable accounts, followed by tax-deferred accounts, and ultimately, tax-exempt accounts. This sequencing strategy ensures that tax-advantaged accounts can continue growing tax-deferred for an extended period. However, a potential challenge is the variability in taxable income, as some years may see higher taxable income than others.

• Proportional Approach – In this withdrawal strategy, a predetermined percentage is set for annual withdrawals from each account, usually based on the proportion of retirement savings in each account type. This method aims to maintain a more consistent tax bill yearly, offering the advantage of potential tax savings throughout your retirement.

4. Invest Wisely

A common error among concerned retirees is the premature shift of their portfolio assets from a growth-focused to an income-focused strategy early in retirement, intending to safeguard their funds. However, this approach can result in significant consequences for a retiree’s long-term income, given the erosive impact of inflation on purchasing power over time. Considering that retirees often live 20 to 30 years or more in retirement, adopting a long-term perspective in investment strategies becomes crucial.