Think you will spend less later?

spending too muchThink again! Here’s the problem this misperception leads too … retirees spend too much early on, and then don’t have any money left when they’re old. This well made point is in the short article, The Notion That You’ll Spend Less In Retirement Is Totally Misguided by Jill Krasney, Business Insider.

This may be a sentiment to justify not having saved enough for retirement in the first place, thus spending more trying to keep their working years standard of living. I have no reference to this observation from the behavioral finance research field, only clinical experience.

You might be thinking … well then, why did they retire? Why not keep on working? People retire earlier than planned because of unforseen circumstances such as illness or job loss. 47% retire earlier than planned in 2012 (you may get an idea of how retirement expectation age changes over time by comparing this value between different years at EBRI.org in their Retirement Confidence Survey).

This misperception leads to faulty planning AT ANY AGE. First, a person doesn’t save enough when they are working because they have the expectation they’ll spend less once they retire (this justifies in their mind why they don’t need to save more – therefore they can spend more now). And then, once retired, they have the expectation that they’ll spend less when they’re older … and once again, they continue to spend more now.

Do you see the problem? Expectations of cutting spending later to justify spending more now. Eventually you will run out of money. Either because the job ended (illness that leads to disability, or job loss) and with it so does the income. Or, what you did save is all gone from higher spending. In either case, yes … your expectation about future spending comes true. But, you are forced into spending less rather than controlling the outcome.

Moral of the story: We are always convinced we can spend less later. Truth is, when “later” gets here we rarely do; and that leads to problems.

There are methods to manage spending … a description of one researched method to manage your resources during retirement in this blog.

Working or retired, here’s a few steps that may help you reign in spending if you feel you should.

 

About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

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