A stock market crash, rising health care costs and stretching the nest egg are common fears for retirees. But the biggest mistake many people make when they retire has little to do with that concern.
Instead, research shows that some retirees actually tend to underspend on their savings, giving up a more enjoyable retirement even if they can’t afford it.
A mistake driven by fear
Couples over the age of 65 typically spend only 2% of their savings, according to research from the Alliance for Lifetime Income. That’s part of what the famous 4% rule says. Retirees prefer to use their lifetime income sources like Social Security, pensions and annuities rather than their retirement savings account.
Part of this may be due to loss aversion, a psychological bias that explains how people prefer to avoid losses rather than pursue gains – and may be why people hold on to their money after leaving work.
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Understanding the age of travel
A fear-driven approach becomes more costly when considering how retirement generally works. Most retirees fall into three categories: travel age, less travel age and no travel age.
The retirement age refers to the early years of retirement, usually in your 60s. This is when you have more free time and energy to pursue important things on your bucket list, like traveling overseas.
Slow age refers to the 70s and early 80s, when your energy starts to fade, but you can still tackle certain bucket list items. Some retirees are starting to slow down and cut back on their spending and activities.
Seniority usually refers to your mid-80s and older. It is the time when many people stop considering international travel and choose a sedentary life. It’s hard to tick off any bucket list items in this category.
Understanding that you’re starting retirement in the Go-go years justifies spending a lot of money up front. Most retirees won’t be able to travel internationally and have an active life in their late 80s, but they can in their early 60s.
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Permission to use
It is important to review your finances and determine how much you can spend during each phase of retirement. Establishing an income base through Social Security, pensions, cash flow from assets and other items can help cover your living expenses. After that, you can set aside some money for your happiness.
Retirees can also talk to their advisors and do an annual “joy audit” to make sure they’re really spending their money. This assessment can help people avoid loss aversion and ensure that their retirement is full of joy during their traveling years.
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How to enjoy retirement
While you want to make sure you have enough for a comfortable retirement, be careful again be careful – especially during your early working years of retirement. Planning for retirement is not just about staying financially secure; and it’s about enjoying the extra time you have on your hands.
