Here’s a surprising question. Do we become too frugal when we retire? Those of us who have spent years pinching our pennies to fatten our nest eggs often find it hard to get out of the habit. At the age when we ought to start spending those savings, we become afraid to touch them.
There are reasons for caution. We don’t know how long we’re going to live; we fear unexpected health care costs in later age; we are earning practically nothing from savings and worry about losing money when stock prices fall. But there’s evidence that we sometimes worry too much — and risk depriving ourselves of pleasures that we can afford.
I’m thinking of the friend who flies to see her grandson only once a year because she wrongly believes that an extra visit would knock her nest egg out of whack. Or the one who has enough money to buy hearing aids but is so shocked by their cost that she stays partially deaf.
Are you stuck, too? Could you spend more on hobbies, grandchildren, charities, fun, without that nagging dread that the money will run out?
For those of you who have only a small amount of savings and live on Social Security and perhaps a small pension, these questions are probably moot. You likely already spend all your income and need your savings for emergencies.
For those who are better fixed, however, overcaution might be crimping your style. A 2016 study from Vanguard’s Center for Retirement Research finds that, on average, savings continue to rise after people retire. A similar study from Texas Tech University finds that even people taking required minimum distributions from their individual retirement accounts tend to save some of that money, rather than spending it all.
Maybe you want to leave more to heirs. But those of you with discretionary income might also underspend because you’re unsure how much of your money you can afford to use.
Here’s one way to figure it out: Add up the income that you can reasonably count on in retirement in the form of regular checks, excluding interest and dividends. That would include Social Security, any pensions or annuities, and any other lifetime sources. To that, add 4 percent of the value of all your financial assets, including stocks, bonds, mutual funds, CDs and cash. This effectively includes your interest and dividends. The total is roughly the amount you can spend each year and still feel sure that your money will last at least 30 years. If you’re spending less than that amount, you can afford some extra grandchild visits, a family visit to Disneyland or Yellowstone, or a week abroad.
There’s no harm in spending even more of your disposable income in early retirement (the go-go years) because you’ll inevitably cut back later (the no-go years). As you get older, it’s normal to worry about running out of money. But don’t worry so much that you forgo joy.