My intent with this “Part 2” post was to delve deeper into the psychological influences on the transition from saving during our work force years to spending in our retirement years. The more I researched, the more it became clear that I was getting into areas over my head- plus it would probably make for uninteresting reading. So now the approach is simply to highlight a mixture of leading thoughts related to this saving-to-spending retirement transition, recognizing that for many (myself included), it’s a challenge.
- Why might this transition be so challenging? Some reasons were mentioned in Part 1, post #80. It may be that after 30-40 years of being so disciplined in building financial resources for retirement, the saving habit has become deeply ingrained and difficult to break (If you’ve read James Clear’s Atomic Habits, you’ll understand). It may also be that saving is one’s financial “comfort zone”. In my opinion, there’s good to be gained for continuing savings habits for either of these cases.
- I suspect many individuals/couples have a strong sense of accomplishment in growing a healthy retirement nest egg over the years. To switch to an emphasis on spending from that accomplishment might seem counterintuitive.
- How did I get here? In my first 30 years in the workforce, did I ever think through the reality of stopping the savings and starting the spending (Answer: No)? There are all sorts of financial approach paths to retirement, but stepping into the new reality of retirement (which is a great feeling, by the way) brings unknowns. Am I really ready? Do I have the necessary resources, especially if the market takes a big downturn? Would I be safer with an extra year of saving? Is my spouse on board with this?
- There probably aren’t too many out there who set a retirement date/goal 10, 20, or 40 years out, and fewer still who stuck with that goal. If you did…..I’m impressed!
- You may have reached a pre-planned goal. For instance, you may have said when you have accumulated an $XXX nest egg and had the house mortgage paid off, that was your retirement goal- time to retire (or is it)?
- The decision to retire may have been forced on you- your position may have been unexpectedly eliminated and suddenly you’re without a job. And you may have felt too old to consider starting a new career. This situation is worth a couple more blog posts sometime.
- Let’s assume you started to feel like retirement was approaching, like I did. What are some of the thought processes and execution details encountered when approaching the end of the accumulation stage (and is it really the end of the accumulation stage)? The initial decision to retire was probably reached by asking the question “Do I have enough financial resources to retire?”, then conducting some basic budgeting, and eventually coming to a “Yes” response. Some of us did this with the help of a financial planner (see Post #60) while others handled this on their own. You likely estimated expenses, determined income sources and concluded that there will consistently be a positive cash flow. So when you reach retirement, you see what it’s like not having a regular paycheck, and start to see how well you estimated cash flow. My experience: I underestimated expenses and had to make some adjustments after the first year (e.g. starting Social Security earlier than I wanted). I was not willing to cut back on expenses or tap into the retirement nest egg…which had lost some value in the stock market’s 2022 downturn.
- A financial planner- to have, or have not? Generally, I am in favor of using a financial planner both for investment planning/execution and retirement planning, as long as he/she is good at their profession. That’s the key- finding a good one that’s also a good match with you (another subject worthy of a separate post). For purposes of transitioning into retirement, a good planner knows how to carry an ongoing dialogue through the years, helping you realize what will be important to you in this part of life, and how to best establish and then use your financial resources. Hopefully your planner will give you a heads up that there may be a challenging saving-to-spending mental shift associated with retirement. Some related thoughts:
- It’s critical that you’re having this ongoing pre-retirement dialogue with your spouse, but it’s also important to bounce thoughts off an outside source, especially if that source is a professional.
- Living with purpose. As you approached retirement, did you have specific life objectives to achieve from here on out (see posts 63 and 74/75)? Is it a goal to maximize the amount of money to pass on to other family members? Are there philanthropic or legacy objectives? Did you want to bump up your lifestyle with exotic travel destinations or a second home? Is minimizing taxes paid a priority? Is it a priority to making sure the nest egg continues to grow?
- Pre-retirement planning. Having the metrics and the knowledge from years of saving, investing, and budgeting should equip you to have the assurance that you can afford to achieve the objectives identified for retirement. It should also give you the assurance that unexpected events can be financially handled. These are important for being able to adjust during the saving-to-spending transition. And check out post #55 on the Four Per Cent Rule.
- I had to go through three other financial planners- while in my 20s and early 30s- before finding my current planner. After working with him for over 30 years, he knows me well, and we’ve been talking about retirement for quite some time. But I’m still learning about myself and what’s important to me in retired life (See the “Untitled” post #89).
- Can you be well prepared for the saving-to-spending transition without benefit of a financial planner? Yes. There are plenty of resources available to properly plan for retirement, but make sure you continually expose yourself to retirement information resources and maintain awareness of ever-changing cash flow status: changing health care requirements, Medicare, Social Security, changes in tax law, Required Minimum Distributions (RMDs), stock market performance, family needs, how long will you be able to travel, etc. Every year’s going to be different, so an annual review and consideration for making adjustments to cash flow is important.
- Some will say, “We’re quite happy with our current lifestyle. We’re doing everything we want, and we absolutely have no need to spend more. Of course it’s nice to know we have the resources available if we really need them.” That’s where you want to be. That’s what you want to conclude at the end of every year!
So there are a mixture of financial considerations for approaching that save-to-spend transition….without addressing any of those psychological aspects for which I am ill-equipped to discuss.
One final thought, from a personal perspective. Actually it’s an ongoing thought process. I have always been cheap. Call it being frugal, being thrifty, or whatever. I get it honestly from my parents, but I could have broken away from that model when out on my own early in adult life. As retirement approached I made some adjustments- we spent more than planned in building the retirement home and I bought the most expensive car we had ever owned (although still practical- it’s nothing close to a Mercedes, a Lexus or a sports car). As I tracked our monthly retirement expenses though, I would still constantly look for ways to cut back because I still wanted to keep building the nest egg. But this persistent research on retired living is moving us towards a different mindset, one with more purpose (back to those earlier posts #63, 74, 75). It’s moving us towards using our assets earlier rather than later- will be interesting to see where this is going to take us!