You’ve spent years putting funds away in order to earn a relatively large retirement income, but spending that income may be more difficult than you expected when you no longer have a paycheck coming in — especially if you’re a “saver” by nature.
Adam Spiegelman, wealth management advisor at Northwestern Mutual, says there’s a psychological shift when you start drawing down your assets.
“Many retirees become more frugal in retirement, regardless of the amount of income or assets they have,” he says. “Their biggest fear is running out of money — and it goes across all levels of net worth, whether you have $1 million or $20 million.”
For example, if you go out to dinner when you’re making a couple hundred thousand dollars a year, paying $100 or $150 isn’t a big deal. But after you’ve retired, that expensive dinner is coming from a bucket of money you’re not replenishing.
Smart Business spoke with Spiegelman about planning to spend your wealth in a way that still provides peace of mind.
Why do some retirees in particular fear that their income is going to run out?
It’s interesting. If you were a big spender during your working years, that won’t necessarily change in retirement — your philosophy is ingrained. The same is true for those who are savers. They are always going to be somewhat frugal and often find retirement spending much more difficult.
For people in their 30s, 40s and 50s, the name of the game is accumulation. But when you retire, the biggest questions are do you have enough money to live for the rest of your life and are you losing principle? That’s why you need a more conservative investment strategy.
What are some options that may put their minds at ease?
If this is something you’re struggling with or you think might be a concern, first hire a professional to oversee everything and put you at ease. It doesn’t matter if you’re an expert on managing money and investments, you don’t want to have to worry about where your money will come from or what funds to sell to fund your lifestyle.
Consider purchasing guaranteed income products like annuities to add to your monthly pension and Social Security income. This is where you turn over a lump sum to a life insurance company and in exchange it provides you a monthly income for life. If you outlive your expected life expectancy, you’ve made money from the deal. (You can estimate your life expectancy with this calculator.)
With annuities, there are many ways to protect your income stream from a sudden death. For example, in a joint and survivor arrangement, you receive a lower monthly payout, but when you die your spouse continues getting that income for the rest of his or her life.
If you want to buy an annuity, do your due diligence because lots of different products, such as market-based annuities or indexed annuities that keep pace with inflation, are available from many companies. Expenses and performance can vary as well.
Another option is an investment or rental property that provides a monthly income, if you have the available discretionary capital. Again, you need to know what you’re doing and like any other investment it may take a while to get a return.
Medicare premiums are an expense that many people approaching retirement might forget about, so get in touch with the state health insurance assistance program, also known as California’s Health Insurance Counseling and Advocacy Program, (800) 434-0222. This volunteer organization consults on Medicare and advises retirees how to find the most efficient and cost effective plan.
Keep track of what you spend and try to stick to a budget. If possible, plan to spend close to what you did in your preretirement years until your 80s. That figure can be dropped by roughly 20 percent later in retirement, but you also want to create a plan for a long-term care event, whether that is spending down some assets or through some other means.
If you’re careful and deliberate in your plan, you can have the peace of mind that you can be comfortable for the rest of your life and still provide for your heirs.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries.
Insights Wealth Management is brought to you by Northwestern Mutual
