Why Affluent Retirees Are Cutting Back on Spending Part II

Last time, we discussed the various reasons affluent retirees are being overly cautious in spending their savings and fully enjoying their retirement life. Reasons ranged from concern over the financial stability of the US economy to emotional responses that prevent retirees from spending. All of them lean towards retirees not taking advantage of living life to the fullest at a period of their lives when they have both the time and resources to enjoy it.

Tips for Spending During Retirement

How do we address this? How do retirees overcome their fear of spending down their life-savings? We have a few tips that should help, so that you can relax and enjoy your well-deserved golden years without depleting your resources.

• Determine the amount of money you can afford to spend each year from your life-savings – The best way to approach this is to consult your financial advisor. Based on your savings and goals, a financial plan can look at different scenarios and utilize a Monte Carlo simulation in addition to other tools that will help predict the probability of success.
• Consider your health – Health in retirement is a blessing and a curse. Healthy retirees want to enjoy their time as much as possible while they are able. That makes spending more in early retirement years desirable. However, poor health can also require more savings to maintain. It’s important to assess your health and have savings available to address it. If your health is good, consider putting some savings aside for vacations while you’re able, not forgetting your “needs” funds for your basic lifestyle needs.
• Research required minimum distributions (RMDs) – RMDs are government mandated withdrawals from defined contribution retirement accounts, such as IRAs, 401(k)s, etc. Withdrawals are mandatory beginning at age 70 ½, however withdrawals are penalty-free starting at age 59 ½.  Withdrawals are subject to income taxes, so be sure to plan for taxes when using these funds.
• Spend socially – Many retirees have an emotional reaction to spending money after a lifetime of saving. Research shows, however, that retirees can overcome these tendencies and enjoy spending money for social activities that connect them with other people. Studies in the US and abroad show a large percent of retirees consider their ability to spend more time with family and having a wide circle of friends to interact with important to their retirement satisfaction.
• Spend joyfully – Don’t put off what can be enjoyed today. Take the cruise. Book the safari. Travel through Europe. Behavioral finance expert, Meir Statman, Professor of Finance of Santa Clara University says, “Evidence indicates a pronounced tendency for diminished consumption beyond age 70, even among those with ample financial resources. A household headed by an 80-year-old spends 43 percent less than a household headed by a 50-year-old. Older people suffer physical limitations that make them less capable of spending money. And for personal reasons, such as the death of a spouse, they are less inclined to spend.”
• Give now – Many retirees don’t spend to their full potential because they want to leave assets to their family when they pass away. Waiting deprives both you and them of the pleasure of your gift giving. In 2017, you can transfer up to $5.49 million ($10.98 million for married couples) during life as a gift or at death through a will, free from gift and estate taxes. This exemption is commonly referred to as your lifetime exemption. In addition to the $5.49 million you can gift during your lifetime, each year you can also gift $14,000 ($28,000 for married couples) to as many people as you like without triggering gift taxes. This exemption is commonly referred to as the annual exclusion. The annual exclusion gifts have no bearing on your lifetime exemption and won't reduce the $5.49 million exemption amount.

Retirement should be the period of your life when you get to relax and enjoy all the fruits of your labor.  Your financial advisor can work with you to address any questions or concerns you may have around retirement spending.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

“Finance Made Simple” blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.