Managing retirement spending woes involves taking stock of financial affairs, understanding how much can be spent, and tracking spending using an online tool. Reframing retirement income as a paycheck from someone else can also help retirees feel more comfortable spending their income.
Managing Retirement Spending Woes
Every retiree is different, and different explanations may ring true based on their personal circumstances. To manage retirement spending woes, retirees can benefit from taking stock of their retirement spending.
This involves gauging financial affairs, having a clear understanding of how much they can spend, and tracking their spending using an online tool.
It’s ideal to do this before retiring, but not essential. On a quarterly basis, retirees should check their overall spending and take note of any categories where their spending patterns have changed. They should also consider whether these changes align with their financial goals.
Reframing Retirement Income as a Paycheck
Research suggests that people using guaranteed income sources are more willing to spend their income. To overcome the underspending problem, retirees can try reframing their retirement income as a paycheck that someone else is paying them. This mindset shift can help them feel more comfortable spending their retirement income.
The narrative of a miserly, Scrooge-like figure hoarding wealth for years instead of enjoying retirement might seem unbelievable, but unfortunately, it’s a cold reality for many retirees. According to the Life Cycle Hypothesis, this shouldn’t need to happen.
A retiree who is financially prepared for retirement should keep a consistent income in retirement, and their overall consumption should not change. About 25% of retirees fall into the camp of people who decrease spending during retirement. Moreover, research suggests that this problem may worsen.
Researchers found that the issue was most pronounced with individuals who use their own savings for retirement income—whereas people with guaranteed sources of income, such as annuities, Social Security, and pensions, were more likely to spend their income.
Why People Have Trouble Shifting from a Saving to Spending Mindset
One line of thinking posits that people simply don’t need to spend as much in retirement. For example, when people retire, they may experience a drop in work-related expenses. However, another line of thought points to more psychological reasons behind a change in spending patterns.
How to Manage Retirement Spending Woes
Every retiree is different, and different explanations may ring true based on their personal circumstances. Retirees may benefit from taking stock of their retirement spending.
Start by gauging your financial affairs and have a clear understanding of how much you can spend. Try tracking your spending using an online tool that breaks down spending by category. It’s ideal to do this before you retire, but not essential. On a quarterly basis, check your overall spending and take note of any categories where your spending patterns have changed.
Do these changes align with your financial goals? Did your spending on eating out suddenly drop, even though you love trying new cuisines with friends?
The Pieces to the Retirement Income Puzzle
If you fall into the underspending camp, research suggests that people using guaranteed income sources are more willing to spend their income. Try reframing your retirement income as a paycheck that someone else is paying you.
Although not spending enough money in retirement may not be a universal problem, it does represent a huge, missed opportunity for retirees in question. It’s essential to remember that this is the money you’ve spent years toiling over and protecting. Now, during a long and happy retirement, is the time to put that money and free time to good use, funneling both resources into your version of a life well-lived.
