We all have “bad” financial habits we’d like to break.
And this time of year brings one of these practices even further into the glimmering holiday light: spending.
It’s easy for retirees to spend through their nest eggs too quickly, leaving them vulnerable later in life. Recent retirees tend to experience this predicament more often as they adjust to their new sense of freedom and adventure.
In fact, a survey discovered that 40% of retirees were spending more than anticipated. And when coupled with rising inflation and market volatility, overspending could leave people unprepared to support their lifestyle long-term.
- What can you do to better prepare for a cash flow plan before retirement?
- Is it possible to balance your bucket-list dreams and safeguard your nest egg?
- How can you establish good practices that leave you living a full and vibrant life through retirement?
Let’s get some answers!
Create A Spending Plan (And Test It Out) Before You Retire
Many pre-retirees assume their cost of living will plummet in retirement, but that’s not necessarily true.
Once they retire, they may be surprised to find that they actually spend more money, not less, especially in areas like travel, entertainment, gifts, and experiences. That’s why many people benefit from planning for their nest egg to replace about 80-90% (even up to 100%) of their pre-retirement income.
Where you fall on the spectrum largely depends on your retirement lifestyle goals, like:
- When you want to retire. Generally, the earlier you retire, the more financial support you’ll need.
- Where you want to live. Do you have plans to downsize? Move to a 55+ or retirement community? Snowbird? Make home upgrades to age in place? Each option comes with different costs and ongoing considerations.
- How you wish to spend your time. Will you take up a part-time job to bring in extra money? You may pursue a new hobby, like writing or photography (both of which can have high price tags with technology needs). Or you could dream of traveling to all 50 U.S states (ask yourself, do you picture staying in 5-star hotels or camping, as those experiences have different costs). How you spend your time directly affects how you’ll spend your money, and no two experiences are alike. That’s why it’s imperative to make a lifestyle plan—so you can use it to contextualize your money and prepare for the transition.
In addition to all the “fun” things you get to spend your money on, you’ll also have to factor in practical expenses like insurance, health care, and taxes.
We can help you create a personalized spending plan based on your goals and projected costs, but things that look perfect on paper aren’t always in practice.
How And Why To Test Drive Your Retirement Spending Plan
When it comes to retirement cash flow planning, try before you buy.
Your spending plan may look incredible on paper until you realize that you didn’t factor in your weekly brunch, quarterly friend’s trip, spoiling your grandchild, joining a golf club, buying a new Tesla, etc. Suddenly, you’re spending far more than you planned for, and your cash flow plan is out of balance with your investments.
To nip this problem in the bud, we encourage our clients to test out their retirement cash flow plan before they turn in their resignation. That way, they can work out any wrinkles and make adjustments while they have the financial security of a steady job.
And when we say try it out, we’re not talking about a couple of days or a week. Try to live by this “budget” for a few months, if possible, to get a true sense of what your lifestyle would look like. Be introspective and think through some questions:
- Does this cash flow plan feel burdensome or restrictive? Why or why not?
- Are there things you think you’re missing out on by spending this way?
- What parts do you think you got right, and why is it working?
In doing this exercise, you may discover that you need an extra $1,000 monthly to support your ideal lifestyle. Great! We can help you think through ways to make up that difference.
It might be working an extra year to max out retirement contributions or employing more aggressive investment strategies for your long-term investments bucket, etc. There are several options depending on your goals, priorities, and lifestyle.
When you know the goal, we can help you review all your options and plan ahead for the retirement you want.
Enter Your Go-Go Phase With Break Lights
When you first enter retirement, you’re typically in your “go-go” spending years. All this means is that you tend to spend more in early retirement as you adjust to your new lifestyle and check off bucket-list items like an around-the-world vacation, a new house, a speed boat, extravagant gifts, unique experiences, etc.
But when does “more” cross the line into “too much”?
While the answer is unique for each person, it often boils down to living above your means consistently, like buying a house that’s far too big and expensive for just you and your spouse or wasting a hundred grand on a boat you only take out a couple of nice days a year.
Another telltale sign of spending “too much” is lumping several large-ticket purchases into one short time frame. That can be challenging for several reasons; namely, it reduces the value of your nest egg, leaving fewer funds to grow and compound over time.
When you have a smaller nest egg, the total income you can produce from that nest egg becomes smaller, limiting your available spending. We can help you see what this looks like in your life using different analyses like the 4% rule.
Plus, spending bigger sums may feel easier with a larger initial balance (aka your nest egg). Where you may have had a $10,000 cash cushion before, you might be tempted to think, what’s $30,000 in the grand scheme of a $4 million nest egg? But justifying large purchases with that mindset can reduce your savings faster than you realize—why do you think most lottery winners end up blowing most of their fortune?
It’s often best to be more strategic surrounding big purchases and make a solid plan before purchasing instead of spending spontaneously, especially on things that don’t align with your values.
What should you do if you find yourself in this position after retiring? Do you need to go back to work full-time?
Depending on your situation, there may be a few options!
Give Your Money Habits A Good Look
Here’s the thing: spending money isn’t intrinsically “bad” even if you go overboard a couple of times.
You worked so hard and saved diligently throughout your career to eventually use that money to support your ideal lifestyle. You need to spend to do that! But if you find yourself dipping into the indulgence pool too often, we challenge you to get curious about that.
- Where is your spending coming from?
- Is it consistent spending, one-time purchases, or both?
- How does that spending make you feel in the moment and in hindsight?
Spending money is really easy, making it challenging to stick with a projected cash flow plan. Often people overspend without realizing it, which is why we want you to be inquisitive and intentional about your money and financial habits. Doing so can help you be more attuned to how you’re using your hard-earned resources.
At TFS Advisors, we believe in the Smart Money Philosophy, which states that there is always, yes, always, a “smart” decision you can make concerning your money. When you remove the emotional and psychological barriers to your spending plan, we can more clearly identify what’s missing and the actions you can take to clear it up.
Once you recognize the root cause of your spending habits, try to brainstorm ways to reduce your spending without harming your ideal lifestyle. Perhaps you’re spending way too much on fancy culinary ingredients that wither in the back of your fridge, kitchen gadgets you use once a year, or boutique fitness classes you don’t attend.
When you add it up, you may be surprised at how much you spend on things that don’t add to your life or align with your goals, values, and priorities.
So, let’s change that!
Put Your Values Front And Center
If you find yourself consistently overspending, the best thing you can do is slow down and refocus on your values. Don’t know where to start? We have a honed process to help you do this!
Start by listing your core values. For you, it might be family, community, and creativity. In that case, spending money on a flight to visit your children and grandchildren is worth it. Or, you may find use investing in a high-quality camera to further your photography hobby.
But you might find less joy in splurging on the latest phone model or upgrading your perfectly functioning car for something flashy.
Take some time to reflect on the following:
- What are your values, goals, and priorities?
- Where do you think your spending habits further those tenets?
- Do you find yourself spending more on things that hinder progress toward your goals? Where are those areas, and how can you intentionally cut back?
While it may feel challenging to spend less at first, if you find that your spending isn’t aligned with what matters most to you, cutting back may not be as hard as you thought. Not wasting resources on things that don’t further your life frees them up to do things that will leave a positive impact.
Don’t Be Afraid Of A Little Change
After reflection, you may need to restructure how you approach your spending. And that’s okay!
Before you make changes, return to your goals, as they will help in the decision-making process. You might find that you want to spend more than you have budgeted for. In that case, you could look into securing part-time work, monetizing a hobby, or starting a business.
Or, it may not actually be about the money at all.
Your spending challenges may be more of a connection issue than a financial one. Take the time to reflect on how you view wealth and spending. Why do certain purchases matter so much to you? What emotions do you attach to spending and your wealth? What hesitancies do you face about spending less?
These questions call for deep thought and may also be helpful to work through with a professional. We offer retirement coaching and counseling services to help you prepare for retirement’s emotional and psychological transition.
Your nest egg isn’t like a luxurious black credit card with an endless money supply. The funds, while likely ample, aren’t unlimited, so it’s critical to make a plan that allows you to live a life you love today without sacrificing your future quality of life.
Our team at TFS Advisors is here to help you make thoughtful, purposeful, and values-driven decisions with your money so that your retirement is as incredible as you have always imagined. Set up a call to review your financial and lifestyle plan for retirement today.