Dave Kennon, Kennon Financial
This week I am going to answer possibly the most important question when it comes to retirement planning. When should you stop saving money?
Maybe it is a question you have never actually thought about before. Without considering this question, and answering it correctly, your good savings habits might actually end up sabotaging your retirement.
What are “good” financial habits?
My client base is largely made up of folks who have saved money throughout their career, learned to live within or below their means, and kept their budget in check.
They have good financial habits, such as:
Paying yourself first. Invest in your savings at the beginning of the month. Don’t make the mistake of waiting until the end of the month to save “whatever is left over” (which is almost always zero).
Use debt sparingly. You may have a mortgage and a car loan, but beyond that, staying out of credit card/student loan / personal loan debt is smart money management.
Defer gratification. If you want something, you don’t necessarily buy it.
Invest in your retirement. Retirement accounts give you a tax deduction up front, and tax deferral until you begin to withdraw the money. Also, a diversified portfolio of stocks and bonds is a powerful way to grow your money.
If you’ve lived your adult life with all of these good financial habits, there is still one more to add. And that takes us back to the question of this blog: When should you stop saving money?
The answer: As soon as you retire.
Retirement is when you’re supposed to spend your retirement money.
Remember, I am only talking to folks that have prepared for retirement. If you have no retirement savings or only a small amount of savings, then spending is not a good idea.
But for those of you who have saved a substantial amount of savings — let’s say around $250,000 or more — I have great news! Once you retire you don’t need to save money anymore.
Here’s an illustrative example from my own family. My grandfather passed away at age 89 with $900,000 in his savings account! We looked at his bank records and he literally saved as much money as he could every month of his entire life. During his 30-year-long retirement, he and my grandmother tried to spend as little money as possible. They never traveled, they never renovated the kitchen, they never even upgraded to a flat-screen TV. He NEVER switched from saving to spending. Not only that, but they worried about their finances the entire time!
What a waste.
I discuss this concept all the time in my office. If you retire with a solid plan regarding your budget, income, and spending, you don’t have to save the excess!
After doing budget worksheets with hundreds of people, I’ve learned that if you don’t have a mortgage, most people can live a very nice lifestyle on $4,000 – $5,000 a month on Florida’s Gulf Coast. (The #1 place to retire!)
The case for spending money in retirement.
Let’s say you need $5,000 a month to live your life. After a careful planning exercise, you determine that $7,000 per month is how much money will come in each month (pensions + social security + investment income – taxes).
That means at the end of a normal month you will have an extra $2,000 in your checking account.
So the question is: Should you save that money? My answer: No.
Spend it! Enjoy it! Spoil the grandkids! Take a spur-of-the-moment trip!
The ultimate irony is that the people who built up the best habits during their working years find it the hardest to stop saving money once they retire.
I’m here to tell you: It’s ok.
I know it feels weird to pull money from savings. I know there is a little panic and fear whenever you “splurge” on a purchase. It’s normal. You are battling a scarcity mentality that you got from your Depression Era parents.
And I’m not even suggesting that you spend the principle. I advise my clients (and my blog readers) that once you retire you should take out 5% of your portfolio balance each year. A diversified portfolio of stocks and bonds (with at least half of the money in stocks) should be able to support that withdrawal.
So, in essence, once you retire, you should spend the money that your money is making. For many people spending money doesn’t feel as traumatic once they realize they are only spending the dividends and interest, and not the principle itself.
You just need to realize that there comes a day when you no longer need to save your money anymore.
There are different seasons in life. A time to save and a time to spend the savings. A time to work and a time to enjoy your retirement. Don’t make the mistake that millions of Baby Boomers are making and wait too long to switch from saving to spending.