People are living longer than ever before and this means that retirement nest eggs often have to stretch for more years than people planned. This can mean that people have less to spend in their early years of retirement than they thought. Unfortunately, spending heavily at the beginning of retirement can severely limit one’s income down the road by reducing the return on investment. Nest eggs grow in proportion to their size and the length of time they have been held. Reducing the principal early in retirement ultimately means lower interest income in the later years. Ultimately, this means that you will run out of money sooner than you expected or be forced to live on a lower income than you had previously planned. If the average rate of inflation is elevated for a long period, this scenario is worsened.
Recent retirees often overspend. This is due to many factors, not the least of which is the end of a steady paycheck and the fact that spending changes need to occur quite abruptly. Settling into new spending patterns can take some time, which also often means a period of overspending. An important point to keep in mind is that recouping these losses is quite difficult once you are no longer working. Thus, it is important to be extra diligent considering how easy it is to spend more than you had intended, especially when you have a lot of newfound time on your hands. The other reason that people overspend early in retirement is by making big, lavish purchases, such as new vehicles or even homes. While this is not a problem provided that it was budgeted for, it can become very problematic if done without proper planning.
The Trap of Excessive Travel in Early Retirement
To avoid overspending in the early years of retirement, it can be helpful to understand what might cause you to spend more than you had intended and to prepare financially for that possibility. One of the most common causes of overspending is travel. People often resolve to travel a lot in the first few years of retirement, typically to knock out some of those bucket list items while still on the younger side. Frontloading retirement may seem like a good plan since that is when you would presumably have the most energy to enjoy your free time and travel extensively. However, travel can deplete savings much faster than people had intended and create a rocky financial future. When this happens, sacrifices need to be made to stay within the new budget that gets established.
When you pull out more money than you had intended early in retirement, your future withdrawals will be smaller than if you adhered to a percentage rule. In other words, depleting your nest egg early can mean your fixed percentage withdrawal will be smaller than you had planned simply because your nest egg is smaller. This problem compounds when you also earn less interest than expected due to the reduced nest egg. On the other hand, if you continue with a fixed withdrawal, you would run out of money sooner than you had expected unless you shift toward a lower number. Both scenarios mean choosing between a lower monthly budget or running out of money.
The Problem with Supporting Adult Children While Retired
The other thing that can frequently lead to overspending in the early years of retirement is by providing support to family members and especially adult children. Parents often do not want to say no to adult children who ask for help and, moreover, may feel obligated to provide support even if it is not explicitly requested. After all, parents will often offer support while they are working, especially since their annual expenses drop significantly once their children move out of the home. However, it is important to remember that these goodwill handouts can mean that their nest eggs can run out far faster than expected. In some cases, with explicit conversations, it can make sense to provide this type of support, especially if the children agree to take their parents in when necessary and help with their care. Retirees should never expect this to happen and instead should ensure that they address it directly with their children.
Retirees who have struggled with overspending or feel that they may be at risk of it, should consider enlisting a financial advisor for help. In particular, a financial advisor with extensive experience in retirement preservation and distribution can help retirees get back on track or create some safeguards to protect themselves from getting off track in the first place. Good financial advisors can also collaborate with people preparing for retirement to ensure they have plans that will support their goals. For example, perhaps you know you want to spend a year traveling when you retire or have enough money to pay for your child’s wedding. The right financial adviser will make sure that you have a plan in place to achieve these goals without putting your financial future at risk. A successful retirement is really an income story. The key is to have a plan in place prior to retirement while you are still making an income, or very shortly after you retire.