3 Retirement Myths Retirees Should Know
Get ready to loosen up those purse strings, because we’re about to debunk three notorious spending myths in retirement. Chances are you’ve heard these nuggets of “helpful advice” before; while they’re often repeated by financial gurus, but they’re rarely supported by facts. So, without further ado, let’s cut through the fearmongering.
Myth #1: Don’t Spend Early
“You might run out of Money!” the so-called “Experts” caution. We think retirees deserve better than scare tactics.
Here’s the deal: a researcher found typical spending in retirement tends to trend upward in the beginning, dip in the middle, and then trend upward again toward the end. The shape essentially looks like a smile (in fact, the research has become known as the “retirement spending smile.”) The increase in the beginning corresponds to retirees enjoying their Health in the early years of their retirement—traveling, dining out, and spending on activities. As retirees age and begin to slow down, and so does the spending, as shown by the dip in the smile. Then, as health problems emerge or long-term care becomes necessary, spending rises again.
While your spending might not follow this exact pattern, there’s an important lesson here. The idea that retirees spend the same amount year after year just doesn’t hold up—and believing it could lead you to save more than you’ll ever need. In short: enjoy the years you’ve worked so hard for. It tends to balance out in the end.
Myth #2: Don’t Spend Any of Your Principal
For argument’s sake, let’s look at the finances of a fictional couple we’ll call Sam & Jill. Sam & Jill have $1.35 million saved and $71,180 of income annually. Their annual living expenses are about $80,000, which exceeds their income, so they use some of their savings, too.
Did that last fact make you panic? Let us fire up the crystal ball and show you why that will turn out ok for Sam & Jill. In addition to the figures above, let’s say during their retirement they also spend another $10,000 annually on Travel, $80,000 one-time on some upgrades to their home, and eventually needed $300,000 for long-term care. (Are you really panicked now?) Drum roll please…
Assuming Sam & Jill stuck their money under a mattress (not recommended) and earned 0% interest their entire retirement, they’d have $212,828 left. YES, money leftover!
What if they kept the money invested for 25 years and earned…
We do the math to show you that it is OK to spend your principal.
Myth #3: Don’t Spend Anything Ever
As if the first two weren’t scary enough!
Let’s be honest—the constant fearmongering around running out of money has led many retirees to feel like any spending at all is a big no-no. And that’s a shame because after all those years of saving and sacrifice you should be able to enjoy the fruits of your labor.
By now, you’ve seen that much of this fear is not “fact.” So where is it coming from?
It’s coming from the financial services industry’s worry about their own bottom line. Returning to our Sam & Jill example, let’s say their $1.35 million in investments is managed by a traditional financial advisor and they pay 2% annually in advisor and investment fees. That means Sam & Jill are paying $26,000 each year in fees! You can see why a financial planner may encourage you to keep as much money in the bank as possible.
Let’s be honest—fear is a lousy foundation for your retirement. That’s why we built the Roadmap for Retirement℠ With your personalized Income Forecast, you’ll see exactly how your income, expenses, and savings stack up. It’s designed to help you enjoy your retirement without second-guessing every decision.
Now go spend your time and money the way you really want.
Disclaimer: Numbers are for illustrative purposes only. Consult a professional for personalized advice.
