You spend 30 or 40 years getting good at saving. Every raise, bonus, or windfall goes toward the future. Then you retire, and the rule you built your whole financial life around flips overnight. Now the job is to use the money you spent decades protecting. For many people, spending in retirement turns out to be harder than saving ever was.
But without spending on what matters to you, decades of careful savings never get to do their job. The point of all that set-aside money is to maintain your standard of living without worrying about finances. Spending is how that promise gets kept.
Why is saving easy to start and hard to stop?
During your working years, saving more, investing sensibly, and watching your balance climb felt like progress. A market downturn stung, but it was temporary because your account had time to recover.
Retirement takes your paycheck away and requires you to pull money from the same accounts that used to grow. Sometimes this means withdrawing funds when the market is down (known as sequence-of-returns risk), which can be counterintuitive.
The deeper psychological challenge is that after decades of being told to spend less and protect your balance, you’re now told to do the opposite. That saving instinct doesn’t disappear the moment your paycheck does. It often lingers for years.
The three-year adjustment for spending in retirement
In our experience, most retirees need about three years to settle into this new way of living off their money. The first year is often the hardest. Your balances start to decline when you make withdrawals, and a small voice asks whether this is really going to work.
By the second year, the plan has held through market changes and a few large purchases, and your confidence starts to build. By the third year, most people have lived the plan long enough to understand how it behaves, so spending in retirement becomes a habit.
Year one feels uncomfortable because you’re trusting a plan you haven’t lived with yet. That’s normal, but there are helpful mindsets and actions to ease this transition.
How to determine what “enough” means to you
To feel free to spend, you first have to know what “enough” means for you. Without that number, you’ll fear your money running out or persistently question if you should have a bigger cushion. Either belief can keep you from the life you’ve saved to enjoy.
“Enough” is a plan you can point to. To help clients define what is enough for them, we recommend:
- Keeping withdrawals at roughly 4%-5% of your portfolio a year (from a portfolio with a balanced mix of stocks and bonds), though the right figure depends on your situation.
- Covering at least 25% of your spending with income that does not move with the market, like Social Security and pensions.
- Stress testing your plan against various market scenarios, including recessions and corrections, aiming for at least an 80% success rate.
These represent our three retirement readiness tests, but they are also tools to support your definition of “enough,” giving you the confidence to spend how you planned to.
One specific area of “enough” to define is the right cash balance for your retirement plan, as cash can provide flexibility, stability, and opportunity. We address considerations for your cash balance in this article.
What permission buys you
For most people, permission comes down to saying yes to a handful of specific things without keeping a running tally, asking if they can afford it. Things like:
- The big trip you keep postponing
- Helping a grandchild with college or a first home
- Giving to a cause you care about while you are around to see the difference
Saying yes is a lot easier when you build your plan to handle your desired spending and review the plan often enough to keep it current.
A Goal Review once a year keeps your spending aligned with your goals and gives you permission to buy into the retirement you want.
Of course, big moments, like a health event, a move, an inheritance, or a change in the family, are worth a deeper conversation when they happen. Your advisor can help you decide what your plan can and cannot handle, so you have one less thing to worry about during change.
To build a plan that gives you permission to enjoy the retirement you worked for, reach out to our team using the form below.
If you’d like to read more like this, review “5 Foundational Ways to Minimize Retirement Anxiety.”
