Ned and Sue Price saved diligently their whole lives, but the Jacksonville, Fla., couple still had worries of running out of money in retirement—especially since a health scare in 2007 led Ned to close his law practice and showed them the potentially devastating costs of long-term care.
Eventually Ned, now 69, opened a less-stressful, and less-lucrative, mediation practice that he and his wife, 58, still operate one or two days a week. But a frugal mindset had become entrenched. “It took us a lot of years to rid ourselves of the guilt of spending, because we were operating under the fear that we would not have enough to last, especially if there was a catastrophic illness,” says Ned.
How did they get past the reluctance to enjoy their savings? Working with their financial advisor, Glenn Ullmann, managing partner at Ullmann Wealth Partners, and an insurance agent, the Prices developed a plan to supplement Ned’s Medicare and Sue’s traditional health insurance with policies to cover health events such as cancer. Ullmann also ensured that the Prices’ portfolio was set up so they could not only maintain their lifestyle, but also travel, donate to charities, and pay for their grandchildren’s college education, among other things. But it still took “constant reassurance” from Ullmann that they weren’t overspending.
There are many unknowns when it comes to spending in retirement, from longevity and healthcare costs to market returns affecting portfolios. And while skittish spenders often are in sound financial position, they often get trapped by fear they will overspend and forgo common retirement pastimes like travel or delay crucial health and household maintenance.
But financial experts say there are a number of ways to alleviate these worries, from envisioning the ideal retirement to clearly mapping out savings and spending:
Martin Seay, associate professor of personal financial planning at Kansas State University, says after spending decades working and finding purpose in work, skittish spenders need to plan out what a meaningful retirement represents to them. Picturing an ideal day in retirement or pursuing activities they care about will help ease the psychological transition since it will help define how much money they need to live on. These goals also reinforce the purpose of retirement savings.
“If they are intentional about the things that they’re going to do in retirement and they thought about that, it helps them understand, ‘Hey, I’m not just wasting money,’ ” Seay says.
During client meetings, Ullmann uses visual scenarios, in addition to spreadsheets, to show clients how different spending levels affect their portfolios annually and over five- and 10-year intervals. For frugal clients, the scenarios will show how their assets might grow over time based on historical returns. He also compiles a financial progress report where he plots their entire portfolio, showing clients’ current asset levels and where those assets should be at year’s end.
If his skittish clients are ahead of their financial plan, Ullmann encourages them to revisit spending goals. For some clients he reminds them to conduct home or car maintenance, and if they delay maintenance, he’ll reintroduce the topic in a few months.
For others who are putting off activities, he’ll try to nudge them into action. He often asks clients to send him photos of trips or fun activities, which he includes in their overall progress reports. It’s another visual reminder and it reinforces that they can enjoy some spending and still stay on their plan.
Jan Blakeley Holman, director of advisor education at Thornburg Investment Management, encourages frugal retirees to earmark a certain amount of money as discretionary spending, whether it’s on an annual, quarterly, or monthly basis. Retirees could create a separate account to actually “see” it as spending money, not unlike the way they may have segregated cash during working years in vacation or emergency funds.
Still, cash flow can be an initial worry for frugal retirees, so Ullmann replicates a paycheck for his clients from their portfolio to help with the transition between working and living off their savings. “If they were making $10,000 a month after taxes that was hitting their checking account, the next month we have the portfolio pay them $10,000 so they never miss a paycheck,” he says.
Holman also says an annuity may be helpful for a skittish spender who may be vexed over the idea that their portfolio value will go down over time because of the withdrawals he or she makes. In particular, an immediate income payout annuity could give a retiree permission to spend that recurring income.
“It’s a way to protect principal and then use the recurring income that is generated by the annuity for spending,” she says.
Savers who are also worried about market volatility may find a fixed annuity or a hybrid investment appealing, Holman says. Hybrids combine a variable option that allows the investor to participate in market appreciation while there’s a lifetime guarantee of income. She also suggests if the saver is worried about inflation, an inflation protection rider on the policy could be an option.
Before jumping into annuities, keep in mind the costs of the different features and riders. Holman also reminds savers that while annuities are flexible, they are considered illiquid, so the investor’s principal is locked up for the indicated period of time.
Seek a Sounding Board
Meanwhile, Seay recommends pre-retirees get a gut-check and have a financial advisor review their portfolio allocation so they know what it means for retirement spending.
Consider how Jeanette Beatty, senior lead planner at Facet Wealth, helped one client on the West Coast get a handle on their finances. Robin, who doesn’t identify as a male or female and uses they and their as pronouns, was a diligent saver their whole life, but never thought they could have enough to stop working without sacrificing their standard of living. Having a daughter at age 45 and the need to save for college added to the financial juggle. Although Robin had a pension with healthcare benefits, had saved in a 401(k) and a Roth IRA, they say they needed help understanding how that money could fund a retirement, in part because they didn’t grow up knowing how to manage money.
About a year ago, Robin, now 65, and their daughter, a junior in college, started working with Beatty, who showed Robin that they and their longtime partner had more money than they realized, in part because Robin conflated a pension from an old job with a 401(k) account because the balances were similar. Not only did Beatty put Robin’s multiple accounts in a dashboard setting, detailing the exact figures, but also showed how the intersection of their savings, responsible spending, lack of debt, and Social Security meant they wouldn’t have to sacrifice in retirement even in worst-case scenarios.
Robin says they’ll probably work for another year or two until their daughter is out of college and they’ve only just begun to believe they’ll be able to pursue their ideal retirement. “I’m kind of learning to accept the parallel universe of fear of poverty that I don’t think I’ll ever lose,” they say, “versus the reality of what is actually true about my financial life.”
This article was written by Debbie Carlson and published in Barron’s on April 30, 2022.
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