How Underspending Could Hurt Your Retirement (Yes, underspending!)
Retirement is a time when you should be able to relax and enjoy your years of hard work and diligent savings. However, we find that for many retirees, the fear of running out of money can lead to a different problem – underspending. Yes, you read that right! While overspending is a common and real concern, not spending enough can also ruin your retirement experience (sounds fun right!?). Let's explore this matter in a way that is easy to understand.
The Worry of Outliving Your Money
It's no secret that one of the biggest worries for retirees is the fear of running out of money before they, well, do run out of life. This fear is understandable, especially for those who have been great savers throughout their working years. Many Americans haven’t saved enough, but there’s people who have spent decades meticulously putting money aside, and the thought of depleting their hard-earned savings can be daunting and tough consider spending down.
The Shadow Fear: Underspending
While the fear of outliving your money is common, there's a lesser-known shadow fear that can creep up on retirees – the fear of actually spending their money. This fear can be so ingrained that some retirees refuse to allow themselves to enjoy the fruits of their labor, even when they have plenty of investments to cover their desired spending. Imagine you've been saving for a big trip to Barcelona since you were a kid. You've worked hard, put money aside, and finally have enough for the trip. But when the time comes, you're so used to saving that you can't bring yourself to spend the money you've saved. That's what underspending in retirement can feel like. We find it very common with the best of savers and investors.
The Consequences of Underspending
Underspending in retirement can have consequences. First and foremost, it can take away from the things you most enjoy and experiences you've worked so hard to afford. If you've saved diligently for decades, it's important to run your numbers and feel confident allowing yourself to spend your money and truly enjoy your retirement years. Additionally, underspending could lead to unintended tax consequences. If you have retirement accounts like IRAs or 401(k)s, you may be required to take minimum distributions (RMDs) at a certain age. If you haven't been spending from those accounts, the RMDs could push you into a higher tax bracket, resulting in a larger tax bill than necessary. Maybe it makes sense to spend more now than let the taxes build up?
What Can You Do?
If you find yourself struggling with the fear of spending in retirement, here are some tips to help you overcome it:
Review Your Budget: Take a close look at your budget and adjust it as needed. Understand where your money is going and where you can afford to spend more.
Consider Tapping into Tax-Deferred Accounts: Before RMDs kick in, it may be wise to start drawing from your tax-deferred accounts like IRAs or 401(k)s. This can help reduce the potential tax burden later on.
Allow Your Advisor to Remind You: If you have a financial advisor, let them remind you that you've earned the right to enjoy your retirement. They can help you understand your financial situation and provide reassurance that it's okay to spend. For most people their goal isn’t to die with all their accumulated wealth, but instead enjoy on things they enjoy or gift some to those they love.
Remember, retirement is a time to enjoy the fruits of your labor. While it's important to be mindful of your spending, underspending can be just as detrimental as overspending. Strike a balance, and don't let the fear of running out of money prevent you from truly living your retirement years to the fullest.
Disclosure:
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. AI (artificial Intelligence) sourced articles may be prone to error, due to the vast information they assemble from the internet. Always confirm any questions or concerns you may have with an experienced professional. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual