My husband quit his full-time job in April, we are going on a trip soon, and we also have major renovations to do on our house, so I am worried about expenses.
No, I’m not crazy and I’m not alone. A recent report found that the problem is that for the majority of retirees, year-to-year spending numbers are neither stable nor predictable.
If you were planning a smooth retirement, that could mean trouble.
“The majority of retirees experience significant changes in their spending patterns over time, with about half experiencing persistent fluctuations — fluctuations (increases or decreases) of 20% or more per year,” Sharon Carson, retirement strategist at JPMorgan Asset Management and author of the report, told me.
But the big question is whether spouses will retire at different times and how that will affect their long-term financial security.
Between retired individuals and spouses who retire at different times, more than half of American households don’t all retire at the same time. Count me in.
As a result, six in 10 couples “will experience spending fluctuations early in retirement, with significant ups and downs from year to year,” Carson said.
What happened?
The concern is that a spending surge soon after retirement could seriously damage your retirement plan, as early, unexpected withdrawals could hurt your overall long-term returns. One of our biggest fears about retirement is running out of money, so it’s scary to think about how much to withdraw from your retirement accounts each year for living expenses. Withdrawing too much could make your future look bleak.
Read more: How much money should you have saved by age 50?
Retirees who take steps to boost their nonretirement portfolio income through strategies such as delaying the start of Social Security benefits until full retirement age (ideally age 70) or working longer are in the best position to weather variable expenses and withdrawals. But so few are doing that: More than four in 10 Americans are taking Social Security benefits as soon as they become eligible at age 62.
In reality, few couples retire at the same time: Ameriprise reports that only 11% of currently retired couples do so at the same time.
The good old 4% rule
We are constantly pressured to save as much as we can while we are working, then when we retire, the shift from saving to spending sets in and we panic.
How much you can spend from your retirement account each year depends on your situation. A 4% withdrawal rate has been the standard for many years and is still used to this day, according to financial advisors I spoke with this week. In other words, if you have saved up, say, $1 million, you’d withdraw $40,000.
The story continues
But what happens when expenses skyrocket, as they do for many partially retired couples? Oh, the trouble.
The JPMorgan study analyzed the spending patterns of more than 280,000 Chase bank customers. “These findings are important because an individual’s financial life may be intertwined with their partner’s,” Carson said.
Read more: Retirement Planning: A Step-by-Step Guide
To that extent, she’s right: The traditional retirement spending model has changed dramatically over the past two decades as dual-income couples have come to dominate American households. (Fifty years ago, the husband was the primary breadwinner in 85% of marriages, according to data from the Pew Research Center.)
“Retirement expenses vary from year to year and are not stable and predictable for the majority of retirees,” Carson said. “When you add in spouses who retire at different times, this becomes a much bigger problem.”
“Dual-earner couples bring new challenges to things, and some of the planning tools and conversations have not yet caught up,” she added.
In retirement, the times when you spend money as if the world is on fire are expected to gradually decrease as you get used to paying from savings. But when it comes to couples creating a financial plan together, it’s not as easy as you might think.
Sure, you’ll plan to increase your spending a little in the first year or so for travel and rewarding yourself for years of hard work, but then you’ll put the brakes on.Most financial planners use a gradual decline in spending to a consistent level approach as a blueprint for budgeting for retirement expenses as a couple.
But that’s not the case. “A lot of people thought they would spend less in retirement,” Carson says. “And what we’ve seen is them spend less, then spend more, then spend less again.”
Be careful about overspending in retirement. (Image: Getty Creative) (Alan Schein Photography via Getty Images)
The report found that these partially retired couples are also spending more to pay off revolving credit card debt. “So they’re on better financial footing, and that’s good news,” Carson said.
Yay.
Here’s how couples who don’t retire at the same time can manage spending spikes in retirement.
Have an honest discussion about expenses before either of you leave the company.
“When people retire, they often earn less and spend more because they now have time to do things they’ve always put off or only dreamed about. This is one of the most stressful conversations I have with clients,” Stephanie McCullough, founder and CEO of Sophia Financial, told me.
Stephanie McCullough (center), founder and CEO of Sophia Financial, said conversations about spending with couples approaching retirement are often tense. (Photo by Stephanie McCullough) (Stephanie McCullough)
Of course, expenses and overall money worries vary widely from person to person. “Every situation is different, so it’s hard to generalize,” says Christine Benz, director of personal finance and retirement planning at Morningstar. “You never know if the salary of the person who’s still working will be able to cover all of the household’s living expenses. If they can’t and the couple needs to pull some money out of their portfolios to cover living expenses, that’s actually a great test run, because a lot of people have a hard time spending from their portfolios. This is retirement spending with training wheels.”
Get used to spending.
Spending money in retirement should be fun, but that’s not always the case. “One of the things that strikes me in my conversations with people is how anxious retired or near-retirement people are about having fun with money and spending money in general,” says Aja Evans, a New York City financial therapist.
“Learning to spend money comfortably and responsibly is just as important as saving and investing for the future. When the time comes to save for retirement and money isn’t coming in at the same time, it can feel guilty.”
One way to take control is to be as open as possible about it. “If we don’t deal with it, a lot of fear, anxiety, stress, worry and anger can come up,” says Evans.
What about my situation? I have a meeting with my financial advisor next week and I’m already nervous.
Kelly Hannon is a senior columnist for Yahoo Finance. She’s an expert on career and retirement strategy and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old to Get Rich.” Follow her at X. Kelly Hannon.
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