Skip to content

    How underspending (yes, underspending) can ruin retirement

    May 23, 2024

    Allworth co-founder Scott Hanson tackles a problem that you wouldn’t think would be an issue: Not spending enough money in retirement.

     

    About the only thing rarer than a hybrid solar eclipse is when Americans achieve a consensus.

    That said, after three decades of advising, it is as clear as ever to me that the #1 retirement worry of great savers remains the fear of outliving their money.

    No shock there.

    And yet a common shadow fear of people who have spent a lifetime saving can emerge when a person retires and has become so conditioned to the accumulation of assets that they, first, refuse to allow themselves to enjoy the fruits of their labor, and second, they subscribe to a “set it and forget it” investment doctrine, which inadvertently sets them up for a monster tax bill when required minimum distributions (RMDs) kick-in later.

    That’s right. Just as sure as you can spend down your savings too quickly, among shrewd savers, it is nearly as common to retire and underspend and under-respond, and that can simultaneously harm your enjoyment of life and cost you money.

    If you’ve saved exceptionally well, but you sense that anxiety about financial scarcity is impacting your life, here is what you could do.

     

    Review your budget and adjust where necessary

    Many people who save well for retirement forever travel down a one-way street. That is, they save, and they save, and they save … and yet they don’t do anything else. For instance, they neglect to have the allocations in their retirement accounts analyzed. They don’t have a thorough understanding of how their cash inflows and outflows will change in the future. And, most importantly, they don’t take the initiative to understand how they can reduce their taxable income during retirement.

    And these can all cause paralysis by under-analysis.

    While the road is long and complex, it all starts with a budget. If you know where your money is going to today, you will be able to estimate where it’s going to go once you retire. Sure, some expenses will be reduced, but others, typically travel, and specifically healthcare, will certainly rise.

     

    Consider tapping into your tax-deferred accounts now

    This is an approach that is both unique to each person’s financial situation AND potentially a massive money saver.

    Now, speak to a fiduciary professional if you elect to tap into your IRAs and 401(k)s before required minimum distributions kick in (RMDs now begin at age 73). But I have seen people - well-meaning, conscientious savers - sit on their traditional IRAs, SEP IRAs, or their various retirement accounts (401(k)s, 403(b)s, etc.), while spending down their other savings, only to find that when RMDs kicked in, they were forced to take such massive withdrawals that they ended up having to pay thousands - even tens of thousands - more in taxes than they might have had they planned better and reduced those balances earlier.

    It really does happen, and yes, it seems counterintuitive, right up until it doesn’t.

    Listen, it’s normal to want to protect your robust 401(k) from the world. It’s been part of your life, perhaps for decades. And just like anything you nurture, over the years, you’ve watched it grow from a sapling into a magnificent Sequoia.

    But virtually anyone with a large retirement account balance should speak with a professional about whether it might be financially prudent to draw that account down, or roll it over, sooner rather than later.

     

    If necessary, allow your advisor to remind you that you’ve earned this

    I’ve been there. That is, I’ve sat across from a couple with many millions in savings, and virtually no expenses, and had them question whether they could risk a trip to Europe.

    After our meeting, I know they felt better about going.

    A marrow-deep fear of scarcity is bred into many of us. (Especially if your parents were Depression era children). If you’ve saved well, I encourage you to live well. That is, knowing precisely what you have, where it goes, and what you can safely spend so you can unworriedly enjoy the fruits of your labor is a superpower.

    Use it wisely – but use it.

     
    © 1993-2024, Allworth Financial. All rights reserved.

      Privacy Policy   |    Disclosures   |    Cookie Preferences   |    Do Not Sell or Share My Personal Information

       

      Advisory services offered through Allworth Financial, a Registered Investment Advisor | Disclosures | Privacy Policy

      Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Check the background of this firm on FINRA's BrokerCheck.

      HMRN Insurance Agency, LLC license #0D34087

      1Barron’s 2024 Top 100 RIA Firms. Barron's© magazine is a trademark of Dow Jones L.P. The ranking of independent advisory companies is based on assets managed by the firms, growth, technology spending, succession planning, and other metrics.

       2 Retention Rate Source: Allworth Internal Data, FY 2022

      3 The NBRI Circle of Excellence Award is bestowed upon NBRI clients meeting one or both of the following criteria: Total Company score at or above the 75th percentile of the NBRI ClearPath Benchmarking Database and/or improvement of five (5) or more benchmarking percentiles in Total Company score over the previous survey. 

      4 As of 7/1/2024, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $22.5 billion in total assets under management and administration. 

      5 InvestmentNews 2020 and 2021 Best Places to Work for Financial Advisers. The ranking reflects survey responses and scores completed by both employers and employees. Employers report their organization’s workplace policies, practices, and demographics. Employees complete a survey designed to measure the employee experience. 

      6  2021 Value of an Advisor Study / Russel Investments

      7 Ranked 9th Top Wealth Managers By Growth in Assets in the U.S. from RIA Channel, 2022. RIA Database and RIA Channel are registered trademarks owned by Labworks, LLC.

      8 USA Today Best Financial Advisory Firms 2024. The ranking is based on the growth of the companies’ assets under management (AUM) over the short and long term and the number of recommendations they received from clients and peers.

      9 NBRI Best in Class Ethics 2023. The Best in Class level is bestowed upon clients performing at or above 90 percentile of the NBRI ClearPath Benchmarking Database.

      ✢ Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.

      ✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.

      †Financial Times, FT 300 Top Registered Investment Advisers, June 2019. The ranking reflects six areas of consideration including the company's years in existence, industry certifications of key employees, AUM, asset growth, SEC compliance record and online accessibility and calculates a numeric score for each company. 

      Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

      Important Information

      The information presented is for educational purposes only and is not intended to be a comprehensive analysis of the topics discussed. It should not be interpreted as personalized investment advice or relied upon as such.

      Allworth Financial, LP (“Allworth”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of the information presented. While efforts are made to ensure the information’s accuracy, it is subject to change without notice. Allworth conducts a reasonable inquiry to determine that information provided by third party sources is reasonable, but cannot guarantee its accuracy or completeness. Opinions expressed are also subject to change without notice and should not be construed as investment advice.

      The information is not intended to convey any implicit or explicit guarantee or sense of assurance that, if followed, any investment strategies referenced will produce a positive or desired outcome. All investments involve risk, including the potential loss of principal. There can be no assurance that any investment strategy or decision will achieve its intended objectives or result in a positive return. It is important to carefully consider your investment goals, risk tolerance, and seek professional advice before making any investment decisions.