For some people, spending money is actually harder than saving it. And that’s especially true for those just starting retirement. From what I’ve seen advising clients, once the paychecks stop coming in, whether from a job, family business or self-employment, it’s a shock. And the natural response is to put a lid on spending.
Even if there’s plenty of assurance — and reassurance — that you have more than enough saved to live well during the next 30 or 40 years (LNWM’s spending sustainability reports usually cover up to age 95, and even 100). So how do you give yourself permission to spend?
First of all, spending money at any time in life is a means to an end. And you have to know what that end is. When you were younger, the ends were probably rather obvious and varied, such as a nice, comfortable house, schooling for the kids, entertaining, community work, helping the grandchildren. When those goals are met or fall away, you need new ones. What are those?
Thinking about what gives you joy might seem strange. Focusing on yourself is often considered selfish. But this is the time of life to do that, especially if you are financially well-off. I’ve found in talking to clients that the easiest way to relax about spending is to focus on what you love to do. I’ve also found that experiences often offer much more reward than buying things. Take a class about something you’ve always been curious about, travel to a continent you’ve never set foot on. Seeking out new experiences in retirement can expand your life in ways you may never have thought possible. Some of my clients also greatly enjoy giving, both time and money, to causes and organizations they care about.
Pay Yourself First
Now back to the actual spending. Giving yourself permission to spend is a mindset, which gets easier over time. One way to give yourself permission is to pay yourself first. You can do this by arranging an automatic transfer – every two weeks at first — into a checking account to cover your usual living expenses and a bit more. This monthly pay can come from a savings account that is a backup source of funds to provide peace of mind.
This is a practical way to give yourself permission (you might be surprised that you need that permission!) to tap into your savings. And making it an automated process means you don’t have to argue with yourself: “I’d love to do this meditation retreat, trip to Majorca, or fill in the blank, and know I can afford it, but do I really want to take money out of savings to pay for it?”
How much should there be in that backup account? That depends on circumstances and finances, but I often advise clients just entering retirement to keep two years’ worth of living expenses in that account, if at all possible. At first, this often seems outrageously high. After all, this is money that can be invested and earn a return instead of idling in cash. But most of my clients find a two-year reserve comforting after a while, especially during periods when investment markets are in decline.
With two years’ worth of cash stashed away, you’ll reward yourself with a real sense of freedom. You can tune out the financial news and not fret about the ups and downs of the market. And if the markets should go down just as you’re tapping into your savings, you won’t need to turn investments into cash at just the wrong time. You’ve set aside a two-year spending cushion.
At LNWM, we keep the rest of your portfolio working for you according to your personal tolerance for market fluctuations. And we run the numbers often to see if your assets and investment portfolio can continue to fund retirement, providing confidence and making spending a bit easier with each passing year.
So if you’re about to retire, or already retired, I urge you to treat yourself to new experiences, pay yourself regularly with the assets you’ve worked hard to accumulate, and relax!