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One of the things you don’t want to see as a financial planner is people in their 70s and 80s looking back and saying they wish they had done things in their 60s, but now they can’t.
Whether that’s because of energy, health, or time, it’s the last thing anyone wants to hear.
But the worst part is the fact that they could’ve enjoyed this. The money, time, and energy were there. But something held them back, specifically, the fear of running out of money.
For Many, Running Out Isn’t the Problem
For decades, we’ve been told the biggest risk in retirement is running out of money. And to be clear, that IS a real risk that needs to be planned for.
But retirees are also aware of this risk and accounting for it too: six out of ten retirees with $500,000 or more in savings still have at least 80% of that a decade into retirement.
The majority of retirees who reach retirement with substantial savings still have nearly all of it 10 years later. Most are either holding steady or continuing to grow their wealth.
This is likely the more responsible move, especially for those concerned with longevity and looking to pass assets to the next of kin.
But it does present a different question entirely:
Are you actually spending enough money in retirement?
The Psychological Trap
With the pre-retirees we work with (who are still working), there seems to be a general consensus:
- Time feels scarce.
- Money feels replaceable.
Since you’re actively earning, you can spend and know that the next paycheck will replenish what you spent.
Your time, on the other hand, is completely taken by your work, your commute, your obligations. You wish you had more of it. There isn’t as much “free” time to go around for folks with full-time jobs.
But then, retirement happens.
Time is now abundant, and it’s money that feels finite.
The relationship flips. What was scarce becomes plentiful. What was plentiful becomes scarce (or at least feels that way).
In retirement, that safety net is gone. And that can scare people into hoarding.
While this may feel secure for new retirees, it creates a concern that shows up 15 or 20 years later when you realize you spent the years you had energy conserving instead of living.
A Story About Italy
I was recently at a dinner with two couples who were both planning trips to Italy – one woman planning a solo trip, and one married couple celebrating their 40th anniversary.
The single woman was excitedly talking about her upcoming trip knowing she was getting over a fear of flying and not one to travel much.
Hearing about the ordeal with the married couple made me chuckle, but was a great story that helps define much of what I’m referring to in this post.
The wife had committed to booking the trip for their 40th anniversary. It was something they had always wanted to do together.
But as the trip got closer, the husband started having second thoughts.
His work schedule may not allow for it, and to step away during his busy season would be a significant challenge.
The wife didn’t seem bothered.
She booked it anyway. And then she said something that stuck with me:
“If we don’t do this now, we may never do this again.”
That’s the truth so many retirees miss.
At 40 years of marriage, now was the time.
Waiting for a “better” time is often waiting for a time that never comes. Waiting until the market is stable enough. Waiting until you’re 100% sure the money will last. Waiting until it feels safer.
Meanwhile, the years pass. The health may change. The spouse may not always be there. The version of you that wanted to go to Italy at 65 may not be the same version of you at 75.
She was right. If they didn’t do it now, they might never do it.
The Retirement Smile
There’s a concept in retirement planning called the Retirement Smile. It refers to how spending typically flows through retirement in three phases.
The Go-Go Years are the early phase – typically your 60s and early 70s. You’re active. You can travel. You can pursue hobbies. You have the energy to enjoy what you saved for. Spending is often at its highest during this phase, and that’s usually appropriate.
The Slow-Go Years come next. Your body starts to slow down. You might take one vacation a year instead of three. You still travel, but not as adventurously. Maybe a spouse’s health changes and travel isn’t the same. Spending typically drops during this phase, not because of the plan but because you’re doing less.
The No-Go Years are the final phase for many retirees. Getting to a family picnic is a big outing. Long trips aren’t happening anymore. But healthcare costs often rise dramatically here, which is why the “smile” curve slopes back up at the end.
Not everyone follows this pattern exactly. Some people are active into their 90s. Others slow down in their 60s. But for a great many retirees, this pattern is real.
The implication is important. If you’re spending your Go-Go Years worried about outliving your money, you may be sacrificing the years when your spending would have generated the most joy.
You don’t need the same amount of money for a Slow-Go trip as you did for a Go-Go trip. And you certainly don’t need the same amount for a No-Go year as for a Go-Go year.
Planning for constant spending across a 30-year retirement often means underspending in the years when spending would have mattered most.
The Three Questions Every Retiree Should Answer
Whether you’re working with an advisor or navigating this yourself, there are three questions worth sitting with.
Question #1: What does your ideal retirement actually look like?
What does a good week look like? A good month? A good year?
If you want to be a snowbird, describe it. Where do you go? For how long? What do you do while you’re there?
If you want to travel, describe it. What countries? How often? With whom?
If you want to see family, describe it. How often? At their place? At yours? What do those visits look like?
If you want to pursue a hobby, describe it. How much time? What does mastery look like?
Many retirees approach retirement by starting with the budget: “Here’s what I can afford, so here’s how I’ll live.” I tend to believe the thinking should be inverted.
The right approach is to start with the life: “Here’s the retirement I want. Now let’s figure out what it costs and whether that’s realistic.”
If you start with the budget, you’ll build a life around what’s comfortable financially. If you start with the life, you’ll build a plan around what’s meaningful personally.
The math still has to work. But the math should be in service of the vision, not the other way around.
Question #2: What are you actually afraid of?
We all have fears. It’s okay to admit them. But most retirees never say them out loud, which means they never get addressed.
What is your biggest fear about retirement?
For some people, it’s running out of money. That’s a legitimate fear that deserves analysis.
For others, it’s not money at all. It’s their health failing. Or losing a spouse. Or becoming a burden to their children. Or being lonely. Or losing their sense of purpose without work.
These are different fears requiring different responses. But you can’t address them if you never articulate them.
If your fear is financial, get a second opinion. Do the math. Understand whether your fear is proportional to the actual risk or whether it’s outsized to your specific situation.
The financial planner Bill Bengen – the creator of what became known as the 4% rule, has himself said the number has since been revised upward. The 4% rule was never a rule in the first place, but rather a guideline. And even Bengen didn’t intend it to be the definitive answer to retirement spending.
For many retirees, applying a mechanical 4% rule may lead to significant underspending. It’s a conservative starting point, but it’s not the ceiling. Depending on your health, your family history of longevity, your other guaranteed income, and your risk tolerance, your safe withdrawal rate might be different.
Question #3: What guaranteed income covers your essentials?
If Social Security and a pension cover your essential expenses such as housing, food, utilities, healthcare, etc. then your portfolio is funding your enjoyment more than your essentials.
That means your portfolio can be used differently. When retirees realize this, it often unlocks permission to spend more. The essentials are covered by guaranteed income. The portfolio can fund the memories and passion projects.
The Things That Will Change
It’s not a maybe, but a definite that family dynamics will shift. Markets will go up and down. Tax rates will change. Healthcare costs will rise. A spouse may pass before you. Your interests may evolve.
All of this is a reason to plan flexibly. Your ideal retirement at 65 may look different from your ideal retirement at 75.
The Two Categories of Risk
When you’re planning for retirement, there are real risks and phantom risks. The real risks must be accounted for, while the phantom risks may present themselves as reasons to not do something adventurous (‘aka’ excuses).
Real risks include
- sequence of return risk in the early years,
- healthcare shocks,
- longevity beyond what you planned for,
- cognitive decline that requires care,
- inflation eroding your purchasing power,
- and the loss of a spouse.
They can genuinely derail or at a minimum significantly alter a retirement, and they should be planned for specifically.
Phantom risks are the ones that feel enormous but don’t hold up under analysis for your specific situation. If you have a strong cash reserve, a diversified portfolio, guaranteed income covering essentials, and a spending rate well below what your portfolio can sustain, you may be losing sleep over risks that aren’t actually threats to you.
Not all fears are proportional. Working with someone who can show you which risks are real for your situation and which aren’t is one of the most valuable things you can do in retirement.
What to Ask Your Advisor
If you’re working with a financial planner, the most important conversations are about the life you actually want to live.
Any good planner should want to know:
- What does an ideal retirement look like for you?
- What are you actually afraid of?
- What have you always wanted to do that you haven’t done yet?
- What would make you feel that this retirement was worth the decades of work?
From there, they should build a plan that supports that vision. They should push you toward the things that matter to you when you’re underspending out of fear. And yes, they should also rein you in when you’re overspending in ways that will hurt you later.
It doesn’t mean taxes, insurance, investments and cash flow planning are irrelevant. Quite the opposite, actually. But any good planner should not be leading with this information, but rather use this information as the bridge to get you to your ideal retirement.
If your advisor can’t help you get to the retirement you actually want, you’re not working with the right advisor.
The Takeaway
If you take one thing from this piece, let it be this:
Focus on the life you want first. Let the numbers support it.
Envision what an ideal retirement looks like. Be specific. Understand it will change over time, but outline what it looks like today.
If it’s important to you to buy the cabin in the woods, mark it down.
If it’s important to you to see family more often, mark it down.
If it’s important to you to travel while you and your spouse are both healthy, mark it down.
Then put numbers to it. Nearly any meaningful goal has a financial component. Figure out what your version of retirement actually costs.
Most retirees keep their fears vague and internal, which lets those fears drive decisions without ever being examined. When you write them down, you can look at them clearly. Are they realistic? Are they proportional? Are they solvable with better planning or better information?
If you get stuck, get a second opinion. Ask someone who can look at your situation honestly and tell you whether your fears match your reality.
The retirees who look back with regret aren’t only the ones who spent too much. They’re also the ones who reached the end of their healthy years with money in the account and experiences still on the list.
Don’t be that retiree.
Now go book the trip.
If you’re approaching retirement or already retired and struggling with the question of whether you’re spending too much, too little, or the right amount, we can help. At Hyperion Financial, we work with our clients to align their money with the life they actually want to live. Click here to schedule a conversation.