One of the most common fears that we hear about from seniors is the fear of running out of money during retirement. While this certainly is a legitimate concern, what is often not discussed is the very common side effect of this fear: Spending too little during retirement.
The process of determining how much you need to save for retirement is extremely complex. It involves projecting future inflation rates, the rate of return on your investments, the potential impact of liquidating investments during down years, plus much more. And once you retire, determining how much you can spend each year is just as complicated.
Unfortunately, this analysis cannot be done by just plugging a few figures into a website and getting the answer. As a result, many people either use a “seat of the pants” approach or do some basic calculations themselves. The problem is that most people I’ve spoken with who use one of these approaches don’t have a lot of confidence in the results. So what they do, just to be safe, is spend as little as possible during their retirement. They don’t travel. They cut way back on dining out. In other words, the quality of their retirement years is not what they had hoped for.
You may be thinking that being financially stronger than you thought you were is a nice problem to have. And you’re right. But only if you know it and do something about it.
When I got into the financial advisory business, I thought that retirement planning would primarily be helping my clients determine how much they need to save every month. And that is something I do. But what I quickly realized is that just as important is helping people who are already retired determine how much they can sensibly spend each year. That knowledge and confidence in their financial situation can open the door to many exciting possibilities – and a much more enjoyable retirement!