Embracing the Retirement Mindset: How to Spend After a Lifetime of Saving

Author: Rachel Buffalo, CFP®, Principal & Senior Wealth Advisor

For many high-net-worth individuals, the transition from accumulating wealth to spending it in retirement can be emotionally challenging. 

After decades of diligent saving and investing, the idea of tapping into your hard-earned assets may feel uncomfortable — or even scary. Rather than a fear of depleting savings, the bigger concern is often simply not knowing what this shift from saving to spending looks like. There can be a fear of the unknown when entering this new phase of life. You might constantly second-guess your spending decisions as you navigate this uncharted territory.

By understanding the psychological barriers to spending in retirement, you'll have a clearer understanding of how to enjoy the retirement lifestyle you've worked so hard to achieve.

Saver's Mentality: A Double-Edged Sword 

The very habits that helped you build wealth – hard work, frugality, and diligent saving – can become obstacles to enjoying your retirement. Many high-net-worth retirees struggle with what we call the "saver's mentality," a deeply ingrained belief that spending is something to avoid or minimize at all costs.

This mentality often stems from a fear of losing control or running out of money. When you've spent your entire career focused on accumulating assets, the idea of drawing them down can be anxiety-provoking. You might worry that you'll make a mistake, overspend, or fall victim to market volatility.

While financial prudence is important, an overly rigid saver's mentality can prevent you from fully enjoying your retirement years. It can lead to unnecessary frugality and missed opportunities. 

Some strategies for overcoming saver’s mentality include:

• Reframe your relationship with money. Try to see spending as a tool for enhancing your life and bringing you joy. Focus on the experiences, relationships, and personal growth that your wealth can facilitate.
• Set realistic spending goals. Work with a financial advisor to create a retirement budget that aligns with your values and priorities. Make sure to include room for discretionary spending on things that bring you happiness, like travel, hobbies, or charitable giving.
• Practice intentional spending. Before making a purchase, ask yourself: "Will this expenditure bring me lasting satisfaction and align with my values?" By being mindful about your spending decisions, you can ensure you're using your money in ways that truly matter to you.
• Give yourself permission to splurge. Whether it's a once-in-a-lifetime trip or a generous gift to a loved one, allow yourself to enjoy your wealth without guilt. These splurges can be planned for in your budget and can provide a sense of excitement and fulfillment.

Remember, you've earned the right to enjoy your money after a lifetime of hard work and diligent saving. Splurging mindfully and within your means is an important part of embracing the retirement phase of life. Your financial plan should include these "fun" expenditures that bring you joy.

Cash flow planning in retirement 

Your financial advisor can help you with cash flow planning, which involves examining your expected income sources and expenses over the course of retirement. This can help you feel more confident about spending in retirement.

By understanding exactly how much income you can expect from sources like Social Security, pensions, rental properties, portfolio withdrawals, and more and comparing that to your anticipated spending, you can get a clear picture of your cash flow sustainability.

Some key considerations in cash flow planning include:

• Establishing a sustainable withdrawal rate from your investment portfolio, typically in the 3-5% range, to minimize the risk of depleting your assets.
• Stress testing your plan against various market conditions, inflation rates, and longevity scenarios to ensure its resilience.
• Segment your portfolio into buckets to meet your short-, medium-, and long-term income needs. For example, a cash bucket for the next 1-2 years' expenses, a bond bucket for the next 3-10 years, and a growth bucket for the longer term.
• Incorporating guaranteed income sources like Social Security and pensions to provide a reliable income floor and reduce reliance on more volatile portfolio withdrawals.

With a cash flow plan, you can spend with confidence, knowing that your income sources will sustainably meet your expenses and lifestyle goals over a multi-decade retirement.

Scenario Planning and Stress Testing Your Portfolio 

To help you feel more confident about spending in retirement, your financial advisor can use scenario planning and stress testing to demonstrate how your wealth can withstand various challenges. You can see the potential impact on your long-term financial security by modeling different market conditions, spending levels, and life events.

For example, let's say you're planning to retire with a $5 million portfolio and a desired annual spending of $200,000. Using Flow, our cash flow planning tool, your advisor might run dozens of scenarios, each with different assumptions about market returns, inflation, and life expectancy. The results might show that in 85% of scenarios, your portfolio lasted at least 30 years with that spending level. This can provide reassurance that your plan is well-positioned to withstand a range of potential outcomes.

Stress testing involves putting your retirement plan through various "what-if" scenarios to assess its strengths and identify vulnerabilities. It's a valuable exercise to pressure test your plan and ensure you're positioned to withstand challenges. Here are some specific scenarios you might consider stress testing:

• A 20% market decline in the first year of retirement
• A period of high inflation (5%+) that lasts several years
• A major unexpected expense, such as a home repair or medical bill
• Living to age 100 or beyond
• Changes to tax rates or investment income streams

By test driving your plan through these kinds of scenarios, you can get a sense of how well it holds up. If vulnerabilities are revealed, you can take corrective action, such as:

• Building a more conservative portfolio to mitigate market risk
• Increasing guaranteed income streams to provide a higher income "floor"
• Adjusting discretionary spending targets
• Exploring insurance solutions to fund long-term care
• Developing contingency plans for changing course if needed

By seeing how your plan holds up under these challenging conditions, you can feel more confident that your spending is sustainable over the long run. If the stress tests reveal vulnerabilities, you can work with your advisor to make adjustments, such as reducing spending, increasing savings, or adjusting your asset allocation.

Giving Yourself Permission to Spend 

Embracing the retirement mindset means giving yourself explicit permission to spend. It also means consciously reframing your relationship with money from one of accumulation to one of enjoyment. It's about recognizing that you've worked hard, saved diligently, and now have the opportunity to use your wealth in ways that bring you happiness and fulfillment.

Giving yourself permission to spend isn't about going on a spending spree or abandoning financial discipline. Rather, it's about finding a balanced approach that allows you to enjoy your retirement lifestyle while still maintaining long-term financial security.

Here are some strategies for giving yourself permission to spend:

• Set clear spending goals. Work with your advisor to establish specific, measurable spending targets that align with your values and priorities. This could include things like travel, hobbies, charitable giving, or supporting family members.
• Incorporate “fun” money. Consider setting aside a portion of your budget for discretionary spending that doesn't need to be justified or tracked. This "fun money" can be used for spontaneous purchases, treats, or experiences that bring you joy.
• Practice gradual increases. If you're uncomfortable with your initial spending target, try increasing it by a set percentage each year. For example, you might start with a 4% withdrawal rate in year one, then increase it by 0.1% each year until you reach your desired spending level. This gradual approach can help you build confidence and overcome the psychological barriers to spending.
• Celebrate your spending. Instead of feeling guilty about your expenditures, try to celebrate them as a reflection of your hard work and success. Take pride in your ability to enjoy your wealth and share it with others.

Finding Purpose and Fulfillment in Retirement 

Ultimately, spending in retirement is about more than just money. It's about using your resources in ways that bring you purpose and joy. Many retirees find that they miss the sense of meaning and structure that work provides and struggle to find new ways to spend their time and energy.

That's why it's so important to think holistically about your retirement goals. What activities bring you a sense of engagement and excitement? What causes or charities ignite your passion? How can you use your skills, experience, and wealth to make a positive impact on the world around you?

For some retirees, that might mean traveling the world. For others, it might mean starting a second career or volunteering for a favorite non-profit. The key is to identify the activities and experiences that align with your values and bring you a sense of purpose.

Here are some questions to consider as you explore what a fulfilling retirement might look like for you:

• What are the things I've always wanted to do, see, or learn?
• What relationships do I want to prioritize and nurture in retirement?
• How can I use my time and resources to make a difference in my community or the world?
• What legacy do I want to leave behind for my family and future generations?

By reflecting on these questions and incorporating your answers into your financial plan, you can create a roadmap that balances your financial security with your desire for meaning and satisfaction.

Conclusion

Shifting from a saver's mentality to a spender's mindset in retirement can be an emotional journey. It requires overcoming deeply ingrained habits, confronting fears about the future, and giving yourself permission to enjoy the fruits of your labor.

However, with the right mindset, strategies, and support, you can embrace this transition with confidence. Remember, your retirement years are a time to celebrate your achievements and enjoy the life you've worked so hard to build. With the guidance of a trusted financial advisor, you can make the most of this exciting new chapter.

If you're looking for help navigating the retirement mindset shift, we would love to be your partner on this journey. Compound Planning’s experienced advisors are dedicated to helping you create a financial plan that balances your need for security with your desire to live life to the fullest. Schedule a free consultation today to learn more about how we can support you in embracing the retirement mindset with confidence and joy.

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