Are you approaching retirement or are you retired and feel you could spend your money a little more freely? You’re not alone. Many people think they can spend freely in their golden years, especially when they see the size of their nest egg growing bigger and bigger every day.
But can you really spend more without depleting your savings? It’s something that worries many retirees, and it’s also why many are reluctant to take a dream vacation or make a major purchase.
Can you afford to spend more money in retirement?
But how do you know if you can afford to splurge once in a while or if you need to reconsider your monthly budget to make room for more entertainment or finer cuisine? Unfortunately, this isn’t an easy question since budgeting for retirement is not an exact science.
Many unpredictable events could force you to dip into your savings sooner than expected and leave you in dire financial straits. However, there are clear signs that you may be able to withdraw it safely and spend more of your retirement money without jeopardizing your financial future. Keep reading to learn more about these good signs.
Sign #1. Your investments have performed better than you initially expected.
If you’ve done your homework throughout your working years and planned your retirement properly, you’ve estimated the income you’ll need for a comfortable retirement. A key part of this plan was probably to estimate the average rate at which your savings would grow each year. This way, you could calculate how much money you needed to save each month for the level of income you wanted in retirement.
Look at your estimated returns on your investments
However, when estimating returns on investment, we purposely underestimate those returns (or are conservative when estimating them) to give ourselves more wiggle room while staying within budget. Therefore, unless you have invested in a fixed rate annuity or something similar, the actual performance of your investments will likely be very different from what you estimated.
For example, stocks have an average annual growth rate of around 10%, but this performance tends to vary each year, which is why most investors prefer to set their expected return at 7% or 8%. On the other hand, if you decide to diversify and invest part of your portfolio in crypto through one of the many crypto exchanges available, you will have a much higher potential return, but things can vary wildly.
Watch what happened to bitcoin if you have any
The average return on Bitcoin is 18%, which looks good on paper, but it’s just an average. Year-over-year returns range from -40% (a heavy loss, to say the least) to almost 500%.
Anyway, let’s say you set your expected return on all your investments (stocks, crypto, gold, real estate, etc.) at the same level as your expected return on stocks, say 8%. Then, if by the time you retire the stock market is only showing average performance (i.e. a 10% return), that extra 2% can add tens of thousands of dollars to your nest egg. And the difference will be even bigger if the crypto market is doing on average.
Because you’re budgeting based on the first estimate, you’ll have a lot more money available to you when you retire, allowing you to spend a lot more than your original budget allowed.
Sign #2. You and your spouse are healthier than expected for your age.
This one is a little more personal, depending on your unique situation. For example, if you or your spouse suffer from chronic health conditions, you may have saved more for medical expenses than the average retiree. However, if your condition improves or science finds a definitive cure or cheaper treatment, you will likely have money left over each month.
How is your health now in retirement?
Plus, even if you don’t have any chronic illnesses, any well-planned retirement budget will still need to factor in the regular checkups and treatments that come with aging. On the other hand, if you stay healthier throughout your golden years than the average Joe, you may not need specific medical tests or treatments, freeing up more money for trips and other fun activities.
Sign #3. You waited longer than expected to dip into your retirement fund.
This one goes hand in hand with the first sign. If you retire later than planned, you’ll have more time for your money to grow and accumulate, resulting in a larger retirement fund. This double effect will allow you to spend much more than initially planned.
How did you calculate your original nest egg? It matters.
On the one hand, all things being equal, the larger retirement fund means more money available each month to spend and enjoy the finer things in life. But, on the other hand, you probably calculated that your original nest egg should last for a certain number of years, say 30 years.
Did you retire later than planned?
If you retire 5 or 10 years later than originally planned, not only will you have more money to distribute over your retirement, but you can also spread it out over a shorter number of years (25 or 20 years, respectively, in our example). This means you can afford to spend a lot more per year.
Of course, you can also opt to spread the larger sum over the same initial period (30 years in our example), greatly reducing your chances of outliving your retirement fund while still being able to spend more than you can afford. are currently.
Sign #4. Inflation was lower than expected when you budgeted for retirement.
This one is a little out of your control, but it can profoundly affect how much you can spend in retirement. It has an equivalent effect since your investments are performing better than expected.
Are you estimating prices?
When most people budget for their retirement, they use current prices as a benchmark to calculate their current cost of living. Then they factor in inflation by estimating how much prices will rise in the future to estimate how much it will cost to maintain the same lifestyle in retirement.
But if inflation isn’t as rampant as expected, your purchasing power will be higher than expected, allowing you to afford a more luxurious lifestyle in retirement on the same budget.
Sign #5. Your “rainy day fund” is already big enough.
It takes discipline and self-control to build a significant emergency fund, but it’s something any personal finance expert will always recommend. But these funds must not continue to grow indefinitely.
Is your emergency fund in place?
There will always come a time when you can say, “I don’t need to save for my emergency fund anymore. For example, if you have an emergency fund that can cover five years of your current living expenses, it’s safe to say that you don’t need to set aside more money for that fund.
This means you’re free to spend that extra amount on something else since it’s already factored into your retirement budget.
Sign #6: You still live in a big, expensive house.
One of the most common tips for retirees is to “downsize” and sell their large family home for a smaller, more manageable condo or apartment. The main reason is to free up extra money that can be spent in retirement, whether it’s for travel, hobbies, or anything else.
The little house
But another often overlooked reason is that a smaller home is cheaper to maintain in terms of property taxes and utility bills. So even if you don’t sell your home and downsize, you’ll have a lot more monthly money to spend on the things you love if you can manage to pay off your mortgage.
Sign #7: You just finished paying off all your debts.
Debt is a burden that can weigh you down, both emotionally and financially. So it’s no surprise that another standard piece of advice for retirees is to make sure they’re debt-free before leaving the workforce. But sadly, nearly half of retirees between the ages of 65 and 79 continue to pay their mortgage.
What does debt free mean?
But debt-free doesn’t just mean having a zero balance on your mortgage. This also includes things like credit cards, car loans, student debt, personal loans to pay for a daughter’s wedding, etc. retirement.
However, once you are done paying off that debt, you will have all that income available to spend as you see fit.
The bottom line
Budgeting in retirement doesn’t have to mean living a frugal, monotonous life. However, while most financial advisors will strive to help you save more and get you in financial shape to provide you with an enjoyable retirement without depleting your savings, there’s a lot to be said for being too cheap once you reach retirement age.
What items do you want and deserve?
After so many years of worrying about not having enough to live on in retirement, it’s easy to not pay for the things you want and deserve when you retire. That’s why it’s so important to be aware of the signs that you might be spending more money in retirement.
Whether it’s because of better-than-expected investments, lower inflation, or because you’re no longer burdened with debt, having more money to spend without compromising your budget can make a big difference in your quality. of life during those golden years.
If any of these signs resonate with you, it might be time to start planning that dream retirement journey.
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