For some people, spending money can be a hard thing to do. As a financial planner, one of the things that has surprised me the most is the difficulty some clients have in spending their money. In this episode of the One for the Money podcast, I share ways to help make spending easier. Listen to the end, where I share a spending tip for the rest of your life.
In this episode...
- Learning to spend in retirement [02:22]
- Why do some people save and some spend? [06:00]
- Being prepared “just in case” [10:02]
- The rest of your life analysis [13:11]
The decumulation paradox
According to a 2018 Investments & Wealth Institute study, nearly six in seven retirees only spend down the earnings in their portfolios and spend none of the principle itself. This phenomenon is called the decumulation paradox.
People who have always been in a saving mode find flipping the switch to spending difficult. Spending can be particularly challenging when someone has retired or is on a mini-retirement because they no longer have a salary every month because everything can depend on their nest egg. This is why people with guaranteed sources of income, such as pensions and annuities, tend to spend more money during retirement.
Spending more in retirement
Psychological barriers can prevent us from spending what would bring more enjoyment and happiness intellectually. Clients may understand that dying the wealthiest person in the graveyard isn’t a good goal, but they may still struggle emotionally with spending money.
I realize that some may see spending more as a “first-world problem,” but I will say that having worked with hundreds of individuals, I’ve seen people with limited income build significant wealth. One of my goals is to encourage people to spend more of what they worked and sacrificed so hard to make possible. It’s important for those who have made wise decisions to save and accumulate funds to spend what they’ve earned. Money is a resource, not an end in itself.
Just in case
Some individuals avoid spending money due to what I call the “just in case” factor. They don’t spend money in case their children require financial assistance, in case they incur medical expenses, or in case they experience an extended long-term care situation. We are all aware of relatives with dementia for years, which appears to factor into our planning for the worst-case scenarios.
There are ways to plan for these scenarios without sacrificing our ability to make memories both now and in retirement. Some of the help I give clients is giving them the peace of mind to spend on what they want. Then, they can make the memories that last lifetimes.
Securities and Advisory services offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.
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