Moving from Saving to Spending
I have the privilege of working with clients who have made smart financial choices and are at the point in their life where they can stop working. However, one of the biggest problems that I see for them is the transition from being a saver to being a spender. Many of my clients have gotten to a comfortable financial place primarily because they were thoughtful and disciplined with their money. Experience has shown me that there are numerous actions that can ease the transition.
Have a financial plan
A financial plan will project your asset balances over the rest of your life based on the assumptions that you have used. When our clients see their projections they have a higher level of confidence that they will not run out of money. More importantly, they can “see” that they will not run out of money. However, projections are only as good as the assumptions and input used. Make sure they are reasonable.
- Growth Rates – Use conservative growth rates so that you are not overestimating the potential for asset growth.
- Expenses – You need to have a good understanding of how much money you will really spend. Don’t forget things like home repair and gifts.
- Health Care and Medical – The biggest missing piece in many projections that I have seen is not including enough for future medical costs.
- Inflation – Use a reasonable number for inflation. 3% is a fair number
Make it monthly
Most people are used to having a paycheck and knowing what they can spend on a monthly basis. You can do the same in retirement. Once you know how much you will get each month for social security and any pension source, the rest will need to come from your assets. Set this up to be a monthly distribution into your checking or savings account. Just like making savings automatic when you were working, making your funding automatic during retirement will make things easier too.
Bucket your assets
Have your assets in distinct buckets that are available for different time periods. There are many ways to bucket your assets but for a simple view consider the following options that may work for you.
- Spending for the next 1-2 years – Keep this amount liquid, such as in a savings or money market account. Your money will not be subject to market fluctuations and you can continue to spend normally. Replenish these accounts on an ongoing basis. Clients often worry that they may be missing out on “gains” in the market but I think the losses have a worse impact. This money would include your regular monthly spending as well as spending for “goals” such as a wedding or large trip.
- Your remaining assets can be invested for your long term growth horizon and risk tolerance. This will usually mean a Fixed Income/Equity split that makes sense for you. This number is really different for everyone. However, don’t forget that we are all living longer and you most likely want to plan on your money lasting 30 more years.
Being a lifelong saver may make it very hard to transition to spending, but the strategies discussed should ease the stress and psychological challenge of doing so.
Your goal should be to enjoy your extra time, not to stress about how to fund it. Enjoy!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes.
Equity investing involves risk including loss of principal.
Fixed income investments are subject to market and interest rate risk if sold prior to maturity. Values will decline as interest rates rise and investments are subject to availability and change in price.