I am a lifelong saver! I will retire in one to two years and everything changes! I have multiple sources of income and enough investments to keep my wife and I very comfortable for more than thirty years. Comfortable is a subjective word, but my mortgage will be paid off and I have no debt. So what is the problem? I have to change my habits and learn how to spend instead of save.
After so many years, stopping work is just one of the challenges you go through as you enter retirement. You can prepare for it in a number of ways, save, invest and work hard to achieve the magic number you need to retire, but it does not hit you until you get close to retirement. You can practice by taking a leave of absence, extended vacation or even a sabbatical, but retirement is something different. When you get to an age you want or can retire, you usually do not get a second chance to go back to work.
In my case, I tried it before when I was thirty–eight years old and became restless. I started businesses because I wanted to stay productive. I enjoyed financial freedom and still do, but this time it is different! I can stop saving and start spending. I am not worried about running out of money and almost all will grow along with inflation either with cost of living adjustment (COLA) increases or market gains. The only threat to my retirement savings/income is lifestyle inflation (increase spending when income goes up)
4 steps to control spending in retirement
Budget – The best way to control spending is to budget! Budget is an estimate of income and expenditure for a set period of time, usually a year. There is two parts of my income; the fixed portion is Social Security and pension. Both have annual COLA adjustments and goes in to my bank account like clockwork. The second part is how much I want to withdraw from my IRA’s. Initially, I plan to withdraw the minimum because it is taxable. My fixed income is sufficient to support my daily living expenses.
Cash – Cash and the equivalents is very foreign to me. I keep very little in savings (low interest bank accounts) or money market account. I like to have my money work for me! When I downsized from a big house, I invested the money in the stock market. When I bought our townhouse I borrowed money for the down payment.Not very conservative of me, but my cash was making more money than the interest I would pay. I paid off the loan in ten months! I believe in having access to cash when I need it vs. cash in the bank.
Asset allocation – Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame. There is a lot of personal finance and investment professionals suggest changing your asset allocation to more conservative investments such as bonds as you get older. I always resisted that trend because it reduces growth. I divided my retirement income into fixed and growth investments. The fixed portion supports my necessities and the growth portion supports my dreams, wishes or variable expenses. I chose to select more conservative mutual funds generating dividends and capital gains.
Flexibility – Plans need to remain flexible considering the lengthy time frame (thirty years or more). If my fixed expenses increase because lifestyle or inflation and I cannot cover it with my fixed income, I may have to withdraw more to cove my fixed expenses. Before I do that, I will analyze or review my expenses to find less expensive choices similar to what I do now. Although I do not plan on working on a regular basis in retirement, I have that option if I need additional income.
My retirement plan is a work in progress which is open to change if it does not work for me. For the most part, I have been practicing these steps or principles all my life. The difference now is I will be spending versus saving. It does not mean I will liquidate my investments or make any other major changes, but I will not likely add anything to my savings. If one of my money making ideas catches, this will all change! I maybe a lifelong saver, but that will change in retirement!
Photo by: Flickr