Shifting to a spending mentality from a saving mentality in retirement

Written on the 21 June 2024 by Parkside InvestorPlus

Have you always been a saver?

Here is a broad-brush profile of a saver.

From the time Darren got his first job at 16, working the register at the local grocer, he had diligently put away a portion of every pay.

Saving for the future was ingrained in his DNA.

Even when he and his wife started a family, they kept to a strict budget, putting money aside for the kid's education and eventually their retirement.

Now at 67, with both kids out of the house and a solid nest egg built up, Darren was struggling to shift his mindset from being a diligent saver to allowing himself and his wife to spend more freely in retirement.

After a lifetime of counting the dollars and putting them away into savings, relaxing the purse strings went against his every instinct.

Yet statistics show most Australian retirees are being overly frugal in their later years.

According to an Investment Trends Retirement Income Report, 67% of retirees are spending less than the recommended amount from their retirement savings each year, instead preserving the bulk of their wealth.

The Report found the average retiree household spends just $36,000 annually from their $510,000 average savings pool, less than half the recommended 7-10% drawdown amount.

For wealthier retirees with $1 million-plus in savings, the median spend is just $52,000 per year.

This reluctance to spend can stem from fear of running out of money later in life, but financial planners warn that being overly frugal can mean a reduced quality of life and inability to afford proper aged care in one's later years.

Many retirees are essentially living for tomorrow instead of making the most of today.

So how can you overcome the saver's mindset that has been drilled into you for decades?

Start by determining a reasonable annual drawdown rate based on your savings, life expectancy, and future financial needs.

Many experts suggest withdrawing around 5% of your portfolio each year to ensure you don't outlive your savings.

Next, make a budget for your desired retirement lifestyle and compare it to your drawdown amount.

This can help reassure you that your spending plans are sustainable.

Setting up a bucket approach where you segregate different pools of money for different needs over the short and long term can also provide peace of mind.

Perhaps most importantly, change your mind set by reminding yourself that you've earned the right to spend after decades of diligent saving and hard work.

Think of it as reaping the rewards of your lifetime of patience and prudence.

Within reason, give yourself permission to spend on travel, hobbies, helping family, and making the most of your golden years.

The  money pot you have built up is meant to be enjoyed, not jealously guarded!

By slowly shifting your mindset, you can embrace a balanced approach of sustainable spending combined with continued saving to ensure you make the most of your retirement.

If you’re ready for retirement and more importantly, you want to enjoy your retirement and not hold back on your deserved lifestyle, contact us at Parkside InvestorPlus at (02) 9899 4899.