To Spend or Not to Spend: A Balanced Approach to a Secure and Fulfilled Retirement

Retirement is a time for relaxation, travel, and pursuing passions, but it also requires careful financial planning to ensure those dreams can become a reality. One of the biggest challenges retirees face is balancing their spending. If they are overspending, they can quickly deplete savings meant to sustain them through their retirement. On the other hand, if they are underspending, they could miss the opportunity to enjoy their most vibrant years of retirement.

Avoid the emotional trap of overspending when transitioning to retirement.
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It goes without saying that spending more in the early years of retirement puts additional pressure on your retirement plan. At StraightLine, we often see clients transitioning into retirement rationalize the need for large purchases. Many times, they do this without considering the loss of future growth on those assets or the potential impact of negative returns. Both scenarios can be devastating in terms of restricting future spending due to an increased likelihood of running out of money. 

According to a 2023 study by Transamerica Center for Retirement Studies, only 19% of retirees have a retirement strategy in the form of a written plan. This lack of formal planning can lead to either overspending, due to underestimating future financial needs or underspending driven by the fear of outliving their resources.*

To be fair, many clients are in a position where they can make such purchases without drastically affecting the long-term sustainability of their retirement plan. As financial advisors, just as we have to rein in spending with some clients, we often find that we have to help others get comfortable with spending more money and enjoying their retirement. While that is a more enjoyable conversation than having to tell a client that they cannot afford to make a purchase, ironically, it is not always easier.
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For those clients who are able to spend more, it is not just about the size of their retirement portfolio. It is about having a balanced approach to planning in preparation for retirement and continuing that planning in retirement. When it comes to planning, it is never too early to begin and never too late to start. However, the 10 years prior to retirement are critical because this is the period where retirement starts to come into view; you start getting a real sense of what you want out of retirement and where you stand in terms of achieving that lifestyle while still having time to accomplish specific goals. At StraightLine, we find that clients who have done this planning are generally better positioned for spending in retirement.

How to know if you are at risk of overspending or underspending?
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There are many factors that need to be considered when ensuring that your withdrawal rate is sustainable throughout retirement and how added expenses not previously considered might impact your plan. To get a general sense of where you stand as a starting point, you can use a simple ratio of your retirement assets to your withdrawal amount using the steps below:

Step 1: Calculate your Retirement Period --Take 95 and subtract your age. For couples, use the age of the younger partner. This number represents the number of years left to fund retirement. While planning for retirement until age 95 might seem long, it is a conservative approach that provides a buffer against uncertainties, such as unexpected expenses or lower-than-expected investment returns. You can always adjust the number up or down for your personal circumstances.

Step 2: Know your Budget--Make sure you have an accurate assessment of your total expenses. Without a formal budget, it is easy to underestimate or overestimate your spending.

Step 3: Calculate your Withdrawal Amount --Deduct any guaranteed income such as pensions, social security, or annuity payments from your total expenses. The remaining amount is your Withdrawal Amount. This is the amount you must distribute from your retirement assets to meet your budget.

Step 4: Calculate your Final Ratio--Divide your retirement assets by your withdrawal amount to get your final ratio.

​Step 5: Compare your Final Ratio to your Retirement Period --You want your ratio to be equal to or greater than your Retirement period. The higher your ratio is compared to your retirement period, the more flexibility you have in your budget for unexpected expenses, large discretionary expenditures, or other shocks, such as poor market performance. The lower the ratio to your retirement period, the more constrained you will be in terms of your spending. 

The above does not replace planning with your advisor by any means. It also does not consider things such as inflation or taxes (although you could adjust your withdrawal amount to include tax withholding). However, what it does do is give you a data point to assess where you stand in terms of your overall spending on your retirement assets at that time. It helps to reduce the emotional or behavioral tendencies that may negatively influence your decision-making.
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Whether you are at risk of overspending or need some help getting comfortable spending more of your assets to enjoy your retirement, here are a few tips anyone can apply to help safeguard their retirement savings when it comes to spending:

Have a budget that accurately reflects your expenses in retirement including your essential living costs and discretionary spending. Without a budget that accurately reflects your expenses, you will have no way of knowing if your retirement assets will be sufficient to cover your income needs for the rest of your life. If you need help with building a budget, we can help you.

Monitor your spending by regularly reviewing your budget and tracking your expenses to identify any changes or potential areas of overspending.

Plan for large expenses by thinking about them well ahead of retirement and saving for them while you are still working. By creating buckets or earmarking assets for certain goals, you can reduce the strain on your retirement assets.

Institute a waiting period before making large discretionary purchases to reduce impulsive behavior or rationalization. This waiting period is a wonderful time to use the retirement assets to spending ratio discussed earlier.

Stay flexible as life circumstances and financial markets can change over time. Be prepared to adjust your spending up or down based on those circumstances. Keep in mind that a large purchase can reduce the flexibility in your plan. Especially if you are taking on additional debt or ongoing expense with the purchase.

Avoid adding new debt for discretionary spending in retirement. This is the time you should be reducing debt not adding debt to maintain flexibility in your plan.
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Consult a financial advisor who can help you develop a sustainable withdrawal strategy from your retirement assets while assessing the impact of any large purchase you may be considering.

By taking proactive steps like the ones mentioned above to manage your finances, you can enjoy your retirement years with peace of mind, knowing that you have safeguarded your savings and positioned yourself for financial stability in the future and a fulfilling retirement. Remember, planning today can help ensure a brighter tomorrow.

If you have any questions or require assistance, please feel free to Contact Us. Your StraightLine team is here to help.

*https://www.transamericainstitute.org/docs/library/research/life-in-retirement-preretirees-expectations-retiree-realities-report-september-2023.pdf?sfvrsn=58f037dc_11

Author

​Rob Rickey, CFP®
​StraightLine's Chief Growth Officer and Financial Advisor

PROFESSIONAL DESIGNATION:
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.  Those certification requirements include education, exam, experience and ethics components--more information is available at Professional Designations. 
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​DISCLOSURE:
​Information presented is for informational purposes only. StraightLine Group, LLC (“StraightLine”) is a registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Past performance is not indicative of future results. Investing involves risk, including the possibility of loss of principal. The ideas and opinions expressed herein do not constitute legal, tax, or investment advice or a recommendation of any particular security or strategy. Before making any investment decision, you should seek expert, professional advice and obtain information regarding the legal, fiscal, regulatory and foreign currency requirements for any investment according to the laws of your home country and place of residence. Any forward-looking statements or forecasts are based on assumptions and actual results may vary. Information presented from third parties is believed to be reliable, but no warranty is provided. StraightLine is not required to update information presented, unless otherwise required by applicable law. For more information about StraightLine, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov/firm/summary/127401 or contact us at 248-269-8366.