You spent years saving. Retirement looks fairly solid on the books.
But can you be too frugal as you near or enter retirement? Uncertain about a splurge?
Experts say that’s actually common, when fiscal discipline doesn’t move toward permission to spend. It can feel unsettling to tap savings or previously off-limits retirement funds.
“There is a psychological switch; it’s not only financial,” said Melanie Keiser, vice president at Hart Capital Management in Spokane.
“A lot of these people who are saying they’re frugal almost to a fault, they have lived with really good financial hygiene for years, and it’s hard to change that habit.”
An objective opinion can help confirm if it’s OK to spend for a trip or fun, she said, such as advice from a financial adviser or partner who understands your financial goals and cash flow.
Look at the big financial picture – immediate and long term.
“It’s unique I think for every person,” she said. “All people need to look at it in a big umbrella way.
“How much money do you have? How many assets do you have? What are your expenses? For expenses, that’s where you have to include some wiggle room in retirement.”
People tend to spend more on hobbies and travel in the first five years of retirement. “Make sure you can do that without feeling pinched.”
Spokane resident Frankie Melvin, 81, did follow sound fiscal principles. She saved steadily at work for retirement, budgeted and lived frugally while raising kids. Before her husband died a couple of years ago, the couple went on cruises but did so by looking for deals.
A cancer survivor, she’s had prior health issues but works to stay active with water aerobics. Her adult children are set financially. So Melvin and her friends sometimes discuss how to know when it’s OK to spend more on what brings joy, versus saving for future health costs or assisted-living expenses.
“For me, I’d like to know how much can I give to charity and still be OK with my own finances?” she asked. “How much can you spend to have a little fun without overspending?
“I splurge maybe by giving more tips at restaurants, going to more luncheons with Red Hatters. I have to smile when I tip at a drive-in, or I buy myself flowers here and there. These small things seem to be kind of big things, because I’ve been frugal, and yet I get so much joy out of it.”
A few pointers can help people maintain financial security and know when it’s OK to splurge, said Jean Setzfand, AARP senior vice president of programs.
If you’ve saved for comfortable annual income in retirement, think of it as paying yourself. Consider guaranteed income such as Social Security, pensions or other regular payments, she said.
To receive Social Security, that benefit is better if you wait until maximum age, Setzfand added.
Using retirement calculators or financial estimates, the goal is to have roughly 70 to 80 percent of your annual work income in retirement, she said, because you no longer have the costs associated with working, like commuting and clothing.
Setzfand also suggests a spending diary for a better idea of living expenses. Think about what income you need to have the lifestyle you want in retirement.
“The way most people feel secure in that retirement phase is if, financially, you’re no different than when you’re working,” she said.
“You’re essentially maintaining your same standard of life.” Assuming you’ve done that, “you can essentially flip the switch.”
Keiser agrees that fear can creep into the best of plans.
“Economic and market concerns breed fears,” she said. “In the last 20 years, we’ve seen two bear markets, most recently in 2008 and the credit crisis. People are still bruised.”
A financial adviser can walk people through different market environments, she said, “and make sure people are not living in fear, so they can still spend and have a joyous life but understand what’s going on with their money.”
Past AARP surveys indicate that people before retirement typically avoid taking financial risks, because of the unknowns of retirement life.
Once retired, people usually are more comfortable, Setzfand said. But sometimes fears creep up, and that’s usually when seniors cut expenses, she said.
“That’s your control lever, to cut back on expenses; it’s a normal behavior,” she added. “Some retirees are afraid they’re going to outlive their retirement assets, and that’s why they’re paring back.”
She suggests people think about ways to grow guaranteed income and draw down retirement accounts at a slower rate to face unknowns, whether rising health care costs or long-term care.
A fixed-income annuity might be an answer for some people, Setzfand said.
“You essentially are giving to an insurance company a lump sum, and they guarantee a payment back to you on a regular basis for the rest of your life that can be monthly or quarterly,” she said.
Other people aren’t good candidates for an annuity. “You don’t want to take all your retirement assets to buy an annuity because then you have no flexibility.”
Peace of mind
Keiser said a plan for the future considers all assets, including if you plan to downsize and sell a larger home. People need to think of how they’ll use that extra cash flow to grow over time.
Investments should be diversified and have some growth and income, “because people are living longer today, so you need that money to grow for the next 30 years,” she said.
A budget is good at any age and to know when you’re spending more. Watch monthly statements and talk to a financial adviser, “so that nothing surprises you. Because there are surprises in life.”
Leading up to retirement, Setzfand suggests eliminating most debt, such as paying down or paying off a mortgage, credit card charges and car payments.
“While you still have that earning power, try to reduce that amount to the bare minimum in terms of reoccurring costs. That’s a way to buy yourself more financial freedom in retirement.”
If you do feel a retirement pinch, consider flexible side jobs from driving Uber to seasonal work, Setzfand said. Seniors also can earn extra by making products in a hobby, selling vintage items or renting a portion of property on Airbnb.
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