Retirement should be one of the most fun times of your life. But, generally, that’s only possible if you’re comfortable spending your life savings. I find that there are two psychological barriers that tend to restrict spending in retirement that I think are largely overlooked by the retirement community. If you intend to get comfortable spending in retirement, it helps to be aware of these barriers and find strategies to deal with them directly.

Self Worth = Net Worth

By default, whether this is intended or not, our self worth is at least moderately tied to our net worth. I think this is primarily due to the fact that our net worth is the only material representation of our cumulative working years. Think about it - outside of the gold watch companies stopped giving out years ago, your portfolio is pretty much it. Spending those dollars might feel like you’re compromising your life’s work.

How You Grew Up

Secondly, many retirees grew up with very little or nothing at all. Why is this important? Because when you grow up with very little or nothing, your portfolio is the comfort that you will not end up back where you started. So, you don’t spend it or you spend as little as possible since it’s the “insurance policy” that you can live life on your terms rather than pinching every penny. I think it’s also a big reason retirees get more conservative with their portfolio than they probably should. Either way, it’s a tough mental hurdle to overcome.

Without a plan, these barriers can be crippling. On the upside, if you suffer from spending avoidance due to the above issues, you may end up leaving a larger legacy than anticipated. But that larger legacy comes at the cost of your own enjoyment in retirement - enjoyment you rightly earned.

Two Ideas to Get Comfortable Spending

I have two ideas to share that may encourage a little more freedom in spending to ensure a more enjoyable retirement. Note that both are built on the foundation of a “spending plan.” Not a budget per say, but establishing reasonable estimates of how you envision your retirement and the spending that lifestyle requires.

A. Establish a Withdrawal Strategy You Actually Understand

First of all, it’s important to know how much your portfolio can likely withstand. While I’ve said before that I’m not a fan of the 4% rule because it’s far too general, it can prove useful in evaluating whether an initial withdrawal strategy is sustainable or not. A helpful starting point is establishing an estimate of your retirement expenses. I’m including a worksheet here…

Retirement Budget Worksheet

If your portfolio withdrawal needs are equal to or less than 4% of your total portfolio value, then it’s at least likely that you are on good footing for your retirement. If not, there is work to be done. However, for purposes of this article, I’m assuming that 4% is sufficient.

If you’ve run the estimates and established that 4% or less is doable, all that’s left is to establish a portfolio strategy to allow for those withdrawals. Whether you choose the bucket strategy I utilize, the guardrails approach, the dynamic spending approach, a dividend strategy or whatever, it should be easy-to-understand. Because if it’s not easy to understand, you are not likely to stick with it when the going gets tough.

Sidenote: I rarely have initial meetings where the couple transitioning into retirement has any idea what the strategy actually is. And this appears to be true across the board - whether they are working with an advisor or not. This is what has led me to believe that part of the reticence to spend might actually be a lack of understanding of what the distribution strategy is. In my opinion, if you have trouble understanding your withdrawal strategy, it’s probably not a great strategy. If you don’t understand yours and want to chat, reach out!

Assuming you have this taken care of and truly feel comfortable with your spending strategy, let’s take this one step further. I want to introduce a concept that you’ve probably not heard of to this point that should hopefully encourage a little more free-spending and hopefully result in more enjoyment in retirement.

B. The Blow-It-Bucket

Forgive the name, but I have yet to figure out a better way to describe it. I’ve written in the past about the idea of various buckets to allow for more comfortable spending, but I want to take it to another level since I still see many retirees - even those that have far more than they could ever spend - worrying about their spending.

As the name implies, a Blow-It Bucket is an annual allotment of money set aside specifically to “blow-it” in whatever form or fashion you see fit. Want a new big-screen TV - here you go. Want to take an unexpected trip to the Adirondacks - here you go. Want to take that helicopter trip over the lava flows while you’re in Hawaii - it’s paid for.

In short, these are dollars that you’ve set aside from previous expense estimates - or in addition to those estimates assuming the total withdrawal still falls at or below 4% - SPECIFICALLY to spend with little (if any) careful thought. Want to call it “spontaneous spending account”, go right ahead. It matters not what you call it, what matters is the freedom that it could provide to you.

And your blow-it-bucket is unique to you. The sole purpose of this bucket is to encourage more freedom in spending with the knowledge that you aren’t compromising your retirement or legacy goals.

I hope that you’ll think more about this and consider setting aside a ration of funds just to have some unexpected fun. The primary goal of retirement is to enjoy yourself and my hope is that by sharing these two ideas with you, you might enjoy yourself a little more!

Thanks for reading!
Ashby Daniels - Pittsburgh Retirement Planner

If you’re looking for a retirement planner to help you make a comfortable transition into retirement and want to see if we’re a good fit, reach out to me here.

Disclaimers: Any opinions are those of Ashby Daniels and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources believed to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about there risks and the suitability of these bonds for you, please contact our office.