The Psychological Side of Spending Your Retirement Savings

The psychological side of spending your retirement savings

Many investors worry about outliving their savings. As a result, they sometimes underestimate what they can comfortably spend in retirement.

For years, you’ve been saving and investing for retirement.

But what happens when you finally retire and it’s time to switch gears from saving to spending?

It turns out, many people are so focused on accu­mulating assets that they never really think about actually withdrawing the money. In fact, recent studies show that many retirees aren’t drawing down their retirement portfolios, opting instead to live on Social Security and the minimum required distributions (aka RMDs) so their portfolios can continue to grow. This may lead to unnecessary sacrifices in a retiree’s standard of living. After almost two decades in retirement, most cur­rent retirees still have 80% of their pre-retirement savings, according to research from BlackRock.

The problem with uncertainty

So why aren’t these retirees spending their nest eggs? Some may be spending as little as possible to leave behind a larger sum for their loved ones or philanthropic pursuits. But in many cases, it’s because they aren’t sure how to determine a sustainable withdrawal rate that accounts for their total lifespan. They worry about the “what ifs” retirement may throw their way and want to be prepared. You may be able to relate.

This latter group understands that over the course of a long-term retire­ment, inflation can erode sav­ings. Portfolio returns can vary, and healthcare costs can quickly escalate. And they may be con­cerned about outliving their savings – only 25% of baby boomers believe their savings will last throughout retirement, according to the Insured Retirement Institute. By spending less and allowing their savings to potentially grow in the early years of retire­ment, they hope to offset some of the uncertainty.

Collaborating with your financial advisor can help increase your confidence about having enough money to live comfortably in retirement. Just like in your working years, you can estab­lish a just-in-case cash cushion or line of credit that helps put you at ease. And having a sound distribution strategy in place – one that takes into account your income sources, lifestyle, asset locations and tax situation – can help you enjoy the retirement lifestyle you envisioned.

Withdrawing your money

When it comes to withdrawing your retirement savings, here are a few things to consider:

Organize your expenses: Three typical categories include essential expenses (think food, housing and insurance), lifestyle expenses (vacations, hobbies) and unexpected expenses (healthcare costs, auto repairs). Consider paying for your essential expenses with guaranteed income sources such as Social Security or annuities. Use growth or income investments to pay for lifestyle expenses, and maintain a cash reserve for any unexpected costs that might occur.

Be flexible. For instance, a downturn in the market is a good time to tighten the reins on your spending. But if you experience some unexpected invest­ment gains, the timing might be right for that dream vacation.

There’s little doubt your income needs will fluctuate during retirement. The early years may be filled with travel and other big-ticket items that require more sub­stantial withdrawals. As time goes on, you’ll likely travel less, but your healthcare expenses may increase. Studies show that spending tends to decline in the later years of retirement, most likely the result of less travel and similar pursuits. People ages 55 to 64 spend on average $60,076 per year, while people ages 65 and over spend $45,221, according to the Bureau of Labor Statistics.

Building in flexibility allows you to go with the flow. Just be sure to regularly touch base with your advisor so your budget can stay on track.

Review your plan. Work with your advisor to develop and review your retirement income and distribution strategies. You can run hypo­thetical simulations based on different withdrawal rates, how many years you will live in retirement or any other contingencies, which will allow you to develop a better idea of how much you can comfortably and confidently spend in retirement to help achieve your goals.

Everyone’s retire­ment situation is different. You may have encountered some unexpected circumstances, such as a layoff or forced retirement that occurred ear­lier than you planned, and you weren’t able to save as much as you hoped. On the other hand, leaving a legacy may be your primary goal. Whatever the case may be, establishing a withdrawal strategy that’s right for you – while also keeping your emotions in check – is often a good plan of action.


Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.