The No. 1 Thing To Do if Monthly Expenses Are Outpacing Your Retirement Income
For retirees accustomed to saving money and fearful of running out, spending too little of their nest egg is a common problem. Then, there are those who have the opposite issue. Gobbling up your retirement income too quickly may be less common than doing so too slowly, but it’s certainly an issue financial planners are familiar with.
“We definitely have clients who underspend, and we have clients who overspend,” said Jorie Johnson, a CFP with New Jersey‑based Financial Futures. “The hard part is finding the balance.”
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Understanding Where the Money Is Going
Johnson said the No. 1 thing overspending retirees must do is identify where they are actually spending their money, which often differs from where they think they are spending it.
“The first step is understanding where it is going,” Johnson said. “The second step is helping them see when they would run out of money.”
Luke Lloyd, a CFP and president/CEO of Kentucky-based Lloyd Financial Group, agreed.
“Most people think they budget,” he said. “But then when you talk to them, you realize they don’t really know where their money is going.”
Subscriptions are a common culprit. Lloyd said retirees often carry dozens of small recurring charges like streaming services, apps and memberships. These subscriptions can add up to hundreds of dollars a month without ever feeling like overspending.
Who Tends To Overspend
Anyone can overspend in retirement, but Lloyd said it is more common for a couple of groups.
“We see it a lot in small-business owners,” he said. “They may have taken a really big risk on themselves. Maybe they were cash‑poor for 20 to 30 years. Now, they want to reward themselves. ‘Now I want to buy that bigger house. Now I want to buy that boat.’”
Couples who have inherited a large amount of money may also get tripped up, he added.
“Anytime someone is not self-made, it’s very common for them to want to up their lifestyle a little too quickly,” Lloyd said.
Johnson sees a lot of couples with poor communication about finances struggle with overspending, especially if they keep their finances separate. However, it isn’t the biggest source of overspending in retirement she sees.
“Grandparents spending money on their grandchildren,” she said. “That’s where we really see the overspending.”
It’s not that grandparents shouldn’t spend money on their grandchildren, Johnson added. It’s about recognizing limits. Another retired couple she advised ran into trouble after setting a very high standard with what they covered for their first grandchild. They couldn’t maintain it when their four grown children each had one to four of their own kids. It took a family meeting to reset expectations.
How To Tell if You Are Overspending
The “4% rule” has been common advice from financial planners for years. It involves not withdrawing more than 4% of your nest egg each year. For example, if you have $1 million saved for retirement, you should avoid taking out more than $40,000 in any given year.
Experts say the rule can still be helpful, but should come with a few caveats. Lloyd predicts continued inflationary pressure and advised considering lowering the figure to 3% or even 2%. Johnson added that many people forget to factor in taxes. Withdrawals from tax‑deferred, taxable and tax‑free accounts all behave differently, and ignoring those differences can distort how much money is truly available.
Another red flag is relying on credit cards to cover monthly expenses. Lloyd recommended setting up monthly distributions and having money for your expenses come out of your bank account.
Whether you’re following the 2%, 3%, 4% or some other withdrawal rule, you may want to up it a bit during your early retirement, often referred to as the “go-go years.”
“Those are the years to do it because you’re younger,” he said. “Between the ages of 80 and 100, you may be less likely to be able to do those things you want to do.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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