Insights & Advice


Transitioning from a saver to a spender

You’ve been saving for retirement over these past twenty-five years. Month after month you have put a little away and watched it grow. Now that you are ready to retire, you need to confront an entirely new concept—spending that money.

It’s not an easy thing for many of us to accept. I have many clients who still haven’t become comfortable with that concept several years into retirement.

“I’m always afraid I’ll run out of money before I die,” says Ellen, a Vermont client who lives so frugally that I have to constantly remind her that it is okay to spend the monthly distributions I send her from her retirement accounts.

If you haven’t already, I would suggest that a good place to start transitioning into a spender mentality is to know how much you can spend. That means taking stock of your financial situation. You do that by gathering all the latest statements of all your investment accounts and consolidate them into one asset statement. Next, do the same exercise with your debt. Subtract your assets from your debts and you end with a statement of your net worth.

Next, figure out how much you have been spending annually over the last couple of years. Will that go up or down in the years ahead? Now, look at your income over the same time period. In retirement, that number will probably go down. You will most likely be living on your investment income, plus social security, maybe some rental property income and any part-time work you may pick up. The money going out minus money coming in is called your cash flow.

Try and consolidate all your income into one single account. You may have a monthly stream of income from an annuity, a pension, social security, interest, dividends, etc. Direct all that income into one place, which will be your primary source of cash. This will allow you to track your income and spending accurately over time.

Once you have accomplished these steps you can now take a hold of your future retirement. The first thing you should do is set aside an emergency fund that would cover roughly six months to one year’s worth of expenses. This is money that you need to stash away in a safe place. It won’t earn you very much, but the point is to have this cash around in the event of some unexpected financial event.

Think of it as insurance money, but your emergency fund doesn’t need to be all in cash stuffed under your mattress. You can invest it in short-term Certificate of Deposits, a short-term bond fund or even, as a last resort, in a checking or savings account (although that is the least attractive alternative).

So many retirees will come to me and insist that their savings must be invested ultra-conservatively. They are terrified that if they lose even a dollar of their principal, they will never recover that money.  Yet, at the same time, they expect to continue living their present life style, go on vacations, gift money to the kids, eat out every night and so on. That’s about the time we sit down and talk about matching their investments to their needs, goals and objectives.

Over the last decade or so, the strategy most money managers have employed is a mixture of income-generating investments and growth assets. Most clients pull between 4-6% of their investable assets out of their savings annually to supplement their social security payments and other income. Any money managers worth their salt should be able to replace that yearly distribution plus add some more return, leaving the retiree’s principal not only intact but actually growing.

On occasion, be prepared to tap into your principal because markets do not always go up. Don’t sweat it. As long as you have some growth assets, the damage to your principal should only be temporary. Stay flexible and on occasion reevaluate where you are. If you have a financial planner, use him or her. If not, you might consider hiring one and a good money manager as well. Just remember, it takes work to become a responsible spender so you better get started.


Posted in Financial Planning, The Retired Advisor