Fully embracing retirement requires some serious mental gymnastics. For most of us, reaching retirement represents the culmination of years–often decades–of diligent saving. Then, almost overnight, we’re expected to switch gears entirely, and seamlessly transition to a mindset of spending. As a result, retirement brings about two equally painful ironies that need confronting.
- Our ability to fully embrace retirement hinges on our ability to set aside the savings mentality that got us to the point of financial security in the first place.
- Those who were the most disciplined savers tend to be the most resistant when it comes to embracing their retirement spending power.
Failing to overcome these mental hurdles, can lead to serious discomfort and drawbacks throughout retirement. Primarily, we can miss out on meaningful experiences and added fulfillment if too much frugality spills into our retirement years.
How Underspending Happens
It’s fairly easy to imagine how underspending can naturally occur during retirement. As mentioned, it’s hard for retirees to shed the accumulation mindset that got them to their current position. So, when retirement withdrawals start, muscle memory often kicks in and retirees can feel inclined to sock some money away for later.
This inclination to keep a healthy safety net isn’t such a bad thing. But, it’s also important to keep in mind that, in some respects, it is “later”. Retirement is precisely the period that this money is meant to be enjoyed. Your past self had the foresight and discipline to put you in a position of financial security. One of the best ways to honor all of your past hard work is by embracing the lifestyle and flexibility it now provides.
Why Underspending Happens
More powerful than the ‘how’ is the ‘why’. The fear of overspending, or eventually outliving your wealth, is extremely powerful and tends to be the primary concern of almost every retiree. Therefore, it’s easy to draw a correlation between the fear of overspending and the action of underspending.
The only way to get to the point where we fully embrace our retirement spending power is by diminishing the fear of overspending. Fortunately, modern retirement planning is very effective at providing safeguards that mitigate the risk of overspending. The core function of your retirement plan should be to instill the confidence needed to spend your retirement income with ease. Otherwise, it’s not serving its true purpose.
Another, often subconscious, motivation for underspending is the desire to preserve and eventually pass on wealth to beneficiaries. While this is a very admirable objective, failing to identify a specific legacy goal often leads retirees to view their assets as one large bucket. The drawback to this thinking is that, essentially, every dollar they spend now is directly taking away from an eventual inheritance they hope to pass on.
In order to counteract this notion of “spending guilt”, we need to determine the level of residual wealth we wish to leave behind, if any. Once a legacy goal has been identified, it can be incorporated into a retirement income plan that guides you toward that desired level of residual assets. Establishing this mental bucket creates added comfort in knowing that our legacy goals are being accounted for, while also reducing any sense of spending guilt that may want to creep in during retirement.
The Cost of Underspending
Certainly, there are retirement risks and priorities that need to be addressed before underspending becomes a serious concern. However, once retirement begins and the necessary safeguards are in place, it’s essential to honestly assess whether we still feel hesitant about spending our safe and sustainable retirement income.
While underspending is not a financial risk in the traditional sense, it absolutely poses a risk to the quality of your retirement experience. The cost of underspending is the unnecessary deferment of discretionary spending that could meaningfully enhance your life. Acknowledging the severity of this cost should be used as an effective counterweight to help retirees embrace the retirement lifestyle they’ve worked so hard to achieve.
