Nearly 40 years of financial planning experience has taught me that retirement is one of the most impactful emotional transitions in life. As you face the shift from earning a paycheck to relying on sources other than work for your income, it is normal for difficult emotions and deeply buried money scripts to surface.
Here are some common retirement money scripts I see.
“I need to start drawing Social Security as soon as I stop working.” Typically, the emotion behind this money script is fear of overspending savings. Yet for many retirees, the best financial strategy is to wait until age 70 to begin receiving Social Security. This often means drawing from retirement savings to span the income gap between retirement and turning 70. Once Social Security benefits start, it’s not unusual that retirees can halt all spending from retirement accounts, giving those accounts a decade or more to rebuild and grow before future withdrawals are needed.
“My expenses will decrease significantly.” Several years ago, a survey on retirement spending by Fidelity Research Institute found that many Americans don’t have a good grasp on how much money it will take to enjoy their golden years. Participants, surveyed both prior to and after retirement, were asked to estimate how much they expected to spend in retirement. Before retiring, 48% expected their expenses to decline from pre-retirement levels. Another third expected expenses to remain about the same. Only 18% expected any increase whatsoever in expenses.
The reality was a bit different. After retirement, expenses actually increased for 39% of retirees, double the number who expected an increase. While 48% expected expenses to decrease, only 33% found that they did.
“I need to protect my investment portfolio from ever declining in value.” The primary emotion with this money script is usually anxiety. Other money scripts that feed the anxiety are, “At this age, my portfolio won’t have time to recover from a market decline so I need to be very conservative,” or “Retirement is no time to take risks with your nest egg.”
I often see retirees who think they need to sell off stocks and bonds (which can decline in value) and add certificates of deposit. If all of your investment portfolio is in stocks when you retire, this can make a lot of sense. However, it’s important to maintain a significant portion of your investments in a diversified portfolio of asset classes that can produce returns greater than CD’s, helping the principal to offset inflation and retain its purchasing power.
Remember, if you retire in your 60’s you may have 20 to 30 years of living yet. This is not the time to eliminate all investment risk. By setting aside one to three years of income in a money market account, you can avoid having to sell investments during a down cycle to fund your monthly income.
“I need to cut non-essential expenses like financial planning and investment advice. I can do this myself.” The primary emotion here is fear. Research presented in the November 2014 Journal of Financial Planning, from a study titled “A Comparison Of Retirement Strategies And Financial Planner Value,” by professors Terrance Martin and Michael Finke, found that those who engaged a comprehensive financial planner had significantly more income, net worth, and retirement savings than those who didn’t.
If you have spent a lifetime following the sage advice of Dick Wagner, CFP, to “Save more, spend less, and don’t do anything stupid,” the transition at retirement to saving less and spending more may feel like doing something stupid. It is not. It is using the resources you have been wise enough to accumulate for precisely their intended purpose.