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Helping natural savers spend in retirement

[It’s FIRE week here at WCI, where we celebrate all things Financial Independence, Retire Early-related, including the Physician on FIRE blog. Every post this week is going to be about topics relevant to the FIRE community.]

By Dr. James M. Dahle, Founder of WCI

While the reverse is much more common, some people find it difficult to spend money. These people are natural savers, and when it comes to the top five financial things to try to do well in life:

  1. To win
  2. to safeguard
  3. Invest
  4. Spend
  5. Give

The first three tend to be much easier than the fourth. This can be especially difficult for retirees. After spending more than 40 years carefully stashing leftover income in a nest egg, it can be psychologically difficult to actually use that nest egg. While there are optimal ways to invest your money to maximize returns and minimize taxes, the behavioral aspects of spending a nest egg are too often overlooked.

Tips for spending in retirement

Aside from constant reminders from family, councilors and themselves that they must “fly first class or their heirs will” and “your hearse won’t have a trailer hitch”, there are a number of techniques that can be used at any age to help someone spend more money.

Expense allowance #1

Some people have successfully used an expense allowance. Most allowances cap your spending, so once you’ve spent the allowance, that’s it. In this case, we use the allocation as minimum spend. It’s a bit artificial, but if you use this system, you have to spend a certain amount every month or every year. You can even add a “penalty” if you don’t. Maybe what you didn’t spend needs to be donated to a person or charity you don’t really like (or donated to a charity you really like)!

#2 Use credit cards

Studies show that we spend more when we use credit cards. So start putting all your purchases on credit cards. Yes, you can still have them automatically reimbursed each month by a transfer from your bank account.

#3 Have someone spend it on your behalf.

In many couples there is a spender and a saver. Even in couples with two savers, one of you is probably a little less savers. So ask that person to spend the money. Katie and I use this one all the time. She buys plane tickets. She goes to the hotel reception while I wait with the children in the car. She orders the thing on Amazon. She catches the bill when the waiter brings her to the table. We ask children to tip the tour guide. Katie doesn’t particularly appreciate all this, but it’s not painful for her. I just like things more when I don’t know what it costs and I’m not directly involved in the payment.

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#4 Don’t look at the price

Here is a similar technique. Don’t look at the price. You already know whether you can afford it or not, but if you never see the price, you’ll avoid the psychological pain of spending. This is how we managed the renovation of our house. By the way, I totally appreciate the renovation of our house and I’m very glad we spent the money on it. We certainly had money to spend, and I knew the total amount because I transferred the money and wrote the big checks to the general contractor. What I didn’t know, however, was the price difference between one option and another with all the countless decisions we had to make. If you’re struggling to spend, try not to look at the price when making your decisions. You’ll probably choose the more expensive option much more frequently, and that’s not such a bad thing.

#5 Buy all at once

The old adage is “buy right or buy twice”. I really don’t spend a lot of time thinking about how much fancy outdoor gear cost me AFTER I bought it. I try to pay only once. High-quality equipment, such as furniture, lasts a very long time. While you may be better off financially with less attractive things, even if you have to replace them once or twice, you may buy less frequently and feel the psychological pain of spending less often just buying nice things. Plus, you have more fun stuff to use! It’s also a good idea to only pay in cash, rather than any sort of ongoing payments that cause psychological pain every month for years.

#6 Prepaid Vacations

Studies show that the best way to maximize vacation happiness is to prepay everything upfront as much as possible. Then you can just enjoy the trip without having to make multiple spending decisions a day. For someone who normally only buys something once or twice a week, having to buy meals, hotels, tours, etc. a dozen times a day on vacation can be a pain. Prepay it so you can enjoy the vacation.

#7 Buy all-inclusive packages

In the same vein, buying an all-inclusive vacation also reduces the number of times you have to spend. Once there, you know that everything is already paid for so you might as well take advantage of it since the money has already been spent. Now go get your money’s worth!

#8 Combine donations and expenses

How about this technique? Need a new car, but your old car still runs fine? Why can’t you find someone who needs that old car more than you? Maybe it’s a niece or a broke medical student. Who knows? But once you give away your old car, well now you MUST buy a new one. You have turned a want into a need.

Now, I know all the natural spenders out there are rolling on the floor laughing at this point in the post. “These stupid savers, they are so stupid,” they say. “Go for therapy.” They may be right, but retail therapy clearly won’t work.

Mold the nest egg to help savers spend

All of these tricks still work in retirement, but there’s more to it. Some of the money is simply easier to spend in retirement than others. It’s not a logical thing, of course; most savers realize that their spending doesn’t make sense either. It’s about behavior, and while it’s not necessarily the right thing to do mathematically, you need to remember that personal finance is both personal (behaviour) and financial (mathematics). Frankly, it’s probably 80% behavior.

Let’s list retirement assets based on how easy they are to spend and why.

Best Assets to Spend in Retirement

As you progress through this list, you move from psychologically, financially, and behaviorally easy-to-spend assets to assets that cost taxes, interest, and hassle. Assets at the bottom of the list can also trigger your scarcity mentality because you feel like you’re running out of money. You might even feel like a fool for spending money that your heirs could use much more than you.

This is a bigger problem for savers than anyone else, because they end up having much bigger savings in retirement than a natural spender. The general idea here is to get as much of your spending money from assets towards the top of the list as possible. Theoretically, this will help you spend more money. Obviously, if that’s not your problem, maybe the assets down the list would be better.

There are a number of things you can do to move assets up the list. You can delay Social Security by spending other assets until you reach age 70 so that your Social Security benefit is greater. If your employer offers you a pension or lump sum, you could take the pension. You could buy a SPIA or two. You can invest in rental properties and even pay them off sooner than you otherwise would to maximize the income from them. Turn off the reinvestment option on your fixed income investments and mutual fund dividends. You can even have them paid directly into your current account. Make sure when you sell assets that you sell the ones with the highest basis. This lowers your tax bill and maximizes the legacy you leave behind.

spend money in retirement

Sometimes it is better to borrow against assets such as your taxable account, rental properties, home, or life insurance policies than to sell or buy them back. Interest cost can be much lower than tax and transaction costs. Many insurance agents claim that whole life insurance helps people spend their money in retirement. I don’t buy it. While a partial surrender may be tax exempt, fully surrendering a policy you’ve held for decades means that all profits are taxable at ordinary tax rates. Perhaps more difficult for a big saver is like spending your children’s inheritance since they are the beneficiaries of the policy. The life insurance death benefit feels like it’s meant to be for someone else, not you.

This position may not apply to you. But if so, hopefully some of these tips will help you enjoy the money you’ve worked so hard to earn and grow.

What do you think? Have you had a problem spending money? What advice would you give to natural savers for spending their money now and in retirement? Comments below!