Shift your mindset from saving to—thoughtfully—spending.

By Russ Hill CFP®, AIFA® from Halbert Hargrove Global Advisors LLC | August 2016

So you’ve recently made the big retirement shift. You used to get a paycheck or receive income from your business. Now you’re taking distributions from the accounts you’ve built for retirement. If you’ve planned and saved carefully for retirement, why are you still worrying?

This article isn’t a paean to illiberal spending. It’s simply an acknowledgement that most people moving into retirement have a difficult time transitioning from saving to spending. Many err on the side of pinching pennies, avoiding spending even when they can afford not to.

Much of this anxiety is rooted deeply in our psyches. It also doesn’t help that the media piles it on by publishing article after article about how retirees are heading towards certain destitution in the next few decades. Don’t get me wrong—too many people haven’t set enough aside. But if you’ve worked hard to build a retirement storehouse, enjoy it. It’s okay to spend what you’ve saved in the way you’ve planned. That’s what it’s for.

Fear of Falling Short

How can you overcome any unwarranted concerns about outliving your retirement savings? Let’s start by probing those money anxieties embedded in all of us. The field of behavioral finance focuses on how our irrational thinking about money prompts us to make irrational financial decisions. I talked about this at greater length in 3 Things You Must Know to Be Financially Literate .

Loss aversion is a big topic of discussion in behavioral finance circles because of the power it wields over us emotionally. Think of loss aversion as risk aversion writ in money terms. For example, losing $500 in the stock market carries greater emotional weight for us than gaining $500. Typically, losses carry more than twice the emotional weight of gains. We are hard-wired to prefer avoiding losses over gaining and winning.

Loss aversion can help us make sense of retirees’ wariness toward spending down assets in retirement accounts. This is particularly true for those who can’t quite get their minds around the fact that spending their assets doesn’t mean they’re “losing” assets.

Here’s a key observation: It might be helpful to reframe how you view spending down your retirement assets and retirement spending in general. I like the term “distribution.” Others prefer to think of it as a “retirement paycheck.” Regardless, spending your retirement savings is not a loss, and it doesn’t present an inordinate risk for those who have carefully developed a formalized plan that can support their retirements.

Launching from a Solid Financial Plan

Let’s talk about that plan. Most people only have one chance to get it right. I’ve “retired” hundreds of times. Not literally, of course. But in working alongside clients over decades, I’ve participated in many meaningful transitions.

How do we arrive at the right spending number? How do we determine how much in assets is enough to outlast today’s increasing longevity projections? Longevity risk looms large in these calculations, and a wide range of considerations is woven into the plan, including many conservative assumptions.

There is no perfect plan—and no two of these are the same. But what they do have in common is a meticulous scenario analysis of the universe of possible outcomes, many meaty conversations and careful planning. The objective is to build a plan that gives you a 99% chance of surviving your assets if you stay within the spending parameters the plan sets out. With the right planning, in other words, your odds of success should be overwhelmingly favorable.

Know What You’re Spending Now

Many people just don’t know their spending levels with any precision. Familiarizing yourself thoroughly with what you’ve been spending, and how that may need to change in retirement, is crucial to enabling you to dispel those worries over running out of assets.

If you’re not sure where to start, an online transaction aggregator such as can be helpful. The point is to track and categorize your spending—by downloading your bank and credit-card transactions and following where your money is going. That overview can give you a clear picture of where you stand and what you can afford to spend with total peace of mind.

Transitioning to retirement is a process. Give yourself six months of working through monthly distributions to cultivate your awareness of where the money is going and where any potential overspending lies. It’s just like getting on a scale. If you pay frequent attention, you’re not going to be taken by surprise or need to make a massive course correction.

A few more things to keep in mind: Most retirees spend more in the early years of their retirement. Average retirees at 85 years old spend considerably less than they did at 75, which in turn is considerably less than when they were a spry 65. And people of median wealth or higher tend to underspend, not overspend. An interesting study from researchers out of Texas Tech University showed that retirees of median wealth had an average consumption gap of 8%, roughly meaning that they spent about 8% less than they could afford. For those of higher wealth, that gap rose as high as 45.6%.

Get out there and enjoy yourself.

Russ Hill CFP®, AIFA® is CEO and Chairman of Halbert Hargrove, based in Long Beach, CA. Russ specializes in investing, financial planning and longevity-awareness solutions.

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