Market crashes, rising health care costs and overstretching a nest egg are common fears for retirees. But a major mistake many people make in retirement has little to do with those concerns.
Instead, a study shows that some retirees actually tend to be too conservative with their savings, forgoing a more enjoyable retirement even if they can afford it.
A fear-driven mistake
Couples age 65 are generally only spending 2% of their savings, according to the study from the Alliance for Lifetime Income. That’s half of what the popular 4% rule suggests. Retirees rather spend from their lifetime income sources such as Social Security, pensions and annuities than from their retirement savings accounts.
Part of this may be due to loss aversion, a psychological bias that describes how people prefer avoiding losses over pursuing gains — and may be why people hold tightly onto their money after leaving work.
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Understanding the go-go years
The fear-driven approach becomes more costly when considering how retirement typically works. Most retirees have three stages: the go-go years, slow-go years and no-go years.
Go-go years refer to the early years of your retirement, generally in your 60s. This is when you have the most free time and energy to pursue key items on your bucket list, such as overseas travel.
Slow-go years refer to your 70s and early 80s, where your energy starts to fade, but you can still tackle some bucket list items. Some retirees start to slow down and cut back on their spending and activities.
No-go years typically refer to your mid-80s and beyond. It’s a time when most people stop considering international travel and opt for a more sedentary life. It’s difficult to check off any bucket list items at this stage.
Understanding that you start your retirement with Go-go years justifies spending more money upfront. Most retirees won’t be able to travel internationally and have an active life in their late 80s, but they can in their early 60s.
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Permission to spend
It’s important to review your finances and determine how much you can spend during each phase of retirement. Establishing a base income with Social Security, a pension, cash flow from assets and other sources may help to cover your living expenses. Then, you can set aside some money for fun.
Retirees can also speak with their advisors and run an annual “joy audit” to ensure they are actually using their money. These audits can help people avoid loss aversion and ensure their retirements are filled with excitement during their Go-go years.
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How to enjoy retirement
While you want to make sure you have enough for a comfortable retirement, be careful of being too cautious — especially during your early, active years of retirement. Retirement planning isn’t just about staying financially secure; it’s also about enjoying the extra time you have on your hands.
