The tale of a miserable Scrooge-like figure may seem implausible, but unfortunately it is not limited to fiction. It’s a cold reality for many retirees.
according to The life cycle hypothesisthis should not happen. A retiree who is financially prepared for retirement should maintain a consistent income in retirement, and their overall consumption should not change.
Who’s Struggling to Spend Their Retirement Income?
About 25% of retirees fall into the camp of people who cut back on spending in retirement.
What’s more, research suggests this problem may be getting worse. The researchers They found that the most significant problem was for people using their savings for retirement income; guaranteed sources of income, for example yearly, Social Securityand pensions, they were more likely to spend their income.
Why do people have trouble switching from a saving mentality to a spending mentality?
One line of thinking is that people shouldn’t spend so much in retirement. For example, when people retire, their work expenses may decline. They may be able to spend more time doing things they had to pay for in the past—now cooking meals at home or mowing their lawn—and looking for the best deals on their purchases. And it might pay off their mortgagethus reducing their expenses.
Another line of thought points to more psychological reasons behind the change in spending patterns.
Before he retires, he can endure one more person current bias (tendency to focus more on the current situation at the expense of long-term planning) because future income from work is not certain, and because they do not yet feel that they own this money. This uncertainty gives them the flexibility to think about things like, “I’ll work extra hours next month to make up for this trip,” or “My boss will cough up that bonus soon.”
However, after retirement, they have a fixed income and the money they are spending comes out of their own pocket. This change leads to loss aversion, meaning that the desire to avoid losses outweighs the desire to experience gains. In retirement, we know that overspending today will mean a certain loss in future consumption. In a world where that future is 85 years old and unable to work, that future loss is much more than a quirk today.
How to handle retirement spending problems
Every retiree is different, and different explanations may be true depending on their personal circumstances, so retirees can benefit from a retirement expense balance.
Start measuring your financial affairs and a clear understanding of how much you can spend.
Try using an expense tracker online tool which divides expenses according to categories. It’s a good idea to do this before you retire, but not essential. Every three months, check your overall spending and note the categories where your spending patterns have changed. Do these changes align with your financial goals? Have you suddenly dropped the cost of eating out, even if you like to try new cuisines with friends?
Pieces of the Retirement Income Puzzle
If you fall into the expense camp, research suggests that people who use sources of income security are willing to spend their income.
If you don’t want to make the leap to income streams, try reframing your retirement income as a paycheck that someone else pays you.
While not spending enough money in retirement may be a universal problem, it’s a huge missed opportunity for the retirees in question. It is important to remember that this is money that you have spent years toiling and protecting. Now, in a long and happy retirement, is the time to put money and free time to good use, channeling both resources into your version of a life well lived.
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This article was provided to The Associated Press by Morningstar. For more personal finance content, go here https://www.morningstar.com/personal-finance
Samantha Lamas is a senior behavioral researcher at Morningstar.
