Are You Being Too Frugal in Retirement?

You might be surprised how common it is to be so afraid to spend that you don’t fully enjoy your retirement. But there are things you can do about that. Here are four tips if your fears are holding you back.

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You’ve worked hard your entire life, and now it’s time to enjoy the fruits of your labor. You have saved, you have budgeted, and you have prepared for this moment for almost all of your working years. But, despite all of these efforts, you are still afraid. You are afraid to spend your hard-earned savings.  You are afraid that you are going to live so long that you run out of money.

Irrational? Actually, it’s very common and in many cases, the worry might be warranted. However, for many — particularly those who have planned properly — the fear is likely unfounded. This overwhelming fear can actually lead to something that does not get much attention: underspending in retirement.

Underspending in retirement is more common than you would think, and it can lead to a less-than-satisfying retirement lifestyle, defeating the purpose of all of that planning.

So how do you strike the right balance between common-sense frugality and frivolity? Here are four tips to help you loosen the purse strings and live a little!

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Create a retirement budget now

If you are having a hard time shifting your mindset from saving money to spending it, you are not alone. Many retirees struggle to enjoy the money they’ve accumulated for retirement. However, when it comes to retirement planning, knowledge is power. The more you know about how much you will need, the greater peace of mind you’ll likely have.

The best way to prepare yourself is to have a solid understanding of your monthly expenses. Start by tracking your income and expenses for a few months to determine how much money you’ll need in retirement to support your desired lifestyle.

With many of us currently working from home because of the COVID-19 pandemic, it is an ideal time to give this a try. Most of us aren’t buying work clothes, having lunch out, or commuting into an office, all of which are expenses you likely won’t have in retirement. Once we return to work and get back to a more “normal” lifestyle, track your expenses again. This should give you an idea of where you spend your money and some places to trim the fat. Budgeting will also help you establish a baseline for retirement spending, so when you do dip into your savings, it will not come as a shock.

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Pay taxes now to keep more of your money later

Most people haven’t considered how much taxes they’ll pay when they start to withdraw their retirement funds. However, one of the biggest mistakes investors make is overfunding their tax-deferred retirement accounts. Instead, watch for opportunities to reduce the amount of taxes you’ll pay on your retirement plan money. After all, a tax-diversified retirement portfolio can enable you to spend more even if your balance isn’t as big as you’d like.

Income tax-free accounts, such as Roth IRAs, health savings accounts, life insurance policies, as well as other after-tax investments, are all important pieces of the retirement planning puzzle. In recent years, Roth IRA conversions, especially for recent retirees, have been gaining momentum by enabling investors to prepay taxes today (when tax rates may be lower than they will be in years to come) in order to avoid a bigger payout in the future.  Your financial adviser can help you decide the right strategy for your specific retirement planning needs.

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It’s OK to be a little selfish

While this may sound harsh, funding your retirement must come first — no matter what other expenses come along. Sacrificing your retirement savings by being overly generous with paying for college or extravagant family vacations only puts you at risk of being left with a shortfall later in retirement. Preparing for your future should be your No. 1 priority. And, let’s face it, your children will thank you when they don’t have to support you during your golden years. So tend to yourself first when planning for retirement and you will be in a better position to live the lifestyle you want in your golden years.

Plan for the unexpected

No one is comfortable with the unknown. Despite the best plans, retirement can often throw us some unexpected curveballs, and this is likely a primary cause of some of that spending fear.

While this fear might not ever completely go away, there is a fix to this problem. Adding risk-management components into your retirement plan now can help alleviate many issues once you are in retirement. Making sure you have guaranteed income via products such as annuities helps ensure you will not find yourself in a bind when something unexpected pops up later on. A life insurance policy that allows for loans or distributions may also be a way to provide protection for unexpected financial events. Again, a financial adviser can help determine the best approach, but being ready for the unexpected will give you an added sense of calm to spend freely in retirement.

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Plan today for a better tomorro

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While there are plenty of cautionary tales about overspending in retirement, underspending can also put a damper on how much enjoyment you get out of retirement. You’ve worked hard for your money, so it’s important to give yourself plenty of opportunities to reap the rewards. A little careful planning now will help you have the retirement you’ve always envisioned – and that includes spending for enjoyment without any guilt or worry.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Kelly LaVigne, J.D.

Vice President, Advanced Markets, Allianz Life

Kelly LaVigne is vice president of advanced markets for Allianz Life Insurance Co., where he is responsible for the development of programs that assist financial professionals in serving clients with retirement, estate planning and tax-related strategies.