When It's Time to Stop Saving for Retirement

Going from saver to spender is mostly a matter of psychology

You've done all the right things—financially speaking, at least—in saving for retirement. You started saving early to take advantage of the power of compounding, maxed out your 401(k) and individual retirement account (IRA) contributions every year, made smart investments, squirreled away money into additional savings, paid down debt, and figured out how to maximize your Social Security benefits.

Now what? When do you stop saving and start enjoying the fruits of your labor?

Key Takeaways

  • You should start spending your nest egg once you are debt-free, and your retirement income covers your expenses plus any inflation.
  • Penny-pinching and denying yourself pleasures in retirement can lead to health problems, including cognitive deterioration.
  • Required minimum distributions from retirement accounts may have to be taken, but they don’t have to be spent and can even be reinvested.
  • Retirees may target spending a certain percentage of their aggregate investment portfolio (i.e. 4% of all investment balances each year).
  • Retirees resistant to spending may keep heirs in mind, though the retiree must ensure their needs are met before the needs of future generations.

Retirement Savings: How Much Is Enough?

Become a Retirement Spender

Many people who have saved consistently for retirement have trouble making the transition from saver to spender when the time comes. Careful saving—for decades, after all—can be a hard habit to break. "Most good savers are terrible spenders," says Joe Anderson, CFP, president of Pure Financial Advisors Inc., in San Diego, Calif.

It’s a challenge most Americans will never face. According to a 2020 report by Fidelity, nearly half (46%) are at risk of being unable to cover essential living expenses—housing, healthcare, food, and the like—during retirement.

Even though it’s an enviable predicament, being too thrifty during retirement can be its own kind of problem. "I see that many people in retirement have more anxiety about running out of money than they had when they were working very stressful jobs," says Anderson. "They begin to live that 'just in case something happens' retirement." 

Ultimately, that kind of fear can be the difference between having a dream retirement and a dreary one. For starters, penny-pinching can be hard on your health, especially if it means skimping on healthy food, not staying physically and mentally active, and putting off healthcare.

Being stuck in saving mode can also cause you to miss out on valuable experiences, from visiting friends and family to learning a new skill to traveling. All these activities have been linked to healthy aging, providing physical, cognitive, and social benefits.

Fear Is a Factor

One reason people have trouble with the transition is fear: in particular, the fear that they will outlive their savings or have medical expenses that leave them destitute. Spending, however, naturally declines during retirement in several ways. You won’t be paying Social Security and Medicare taxes anymore, for example, or contributing to a retirement plan. Also, many of your work-related expenses—commuting, clothing, and frequent lunches out, to name three—will cost less or disappear.

To calm people’s nerves, Anderson does a demo for them, "running a cash-flow projection based on a very safe withdrawal rate of 1% to 2% of their investable assets," he says. "Through the projection, they can determine how much money they will have, factoring in their spending, inflation, taxes, etc. This will show them that it's okay to spend the money."

In retirement, it may be necessary to put your needs ahead of those of your children. This is especially true regarding your health, housing, or quality of life environment.

Heirs Are Another Concern

Another reason some retirees resist spending is that they have a particular dollar figure in mind that they want to leave their kids or some other beneficiary. That's admirable—to a point. It doesn't make sense to live off peanut butter and jelly during retirement just to make things easier for your heirs.

Mark Hebner, founder, and president of Index Fund Advisors in Irvine, Calif., puts it this way:

Retirees should always prioritize their needs over their children's. Although it is always the desire for parents to take care of their children, it should never come at the expense of their own needs while in retirement. Many parents don't want to become a burden on their children in retirement, and ensuring their own financial success will make sure they maintain their independence.

When to Start Spending

As there’s no magic age that dictates when it's time to switch from saver to spender (some people can retire at 40, while most have to wait until their 60s or even 70+), you have to consider your own financial situation and lifestyle. A general rule of thumb says it’s safe to stop saving and start spending once you are debt-free, and your retirement income from Social Security, pension, retirement accounts, etc. can cover your expenses and inflation.

Of course, this approach only works if you don't go overboard with your spending. Creating a budget can help you stay on track.

RMDs: A Line in the Sand

Even if you find it hard to spend your nest egg, you'll have to start cashing out a portion of your retirement savings each year once you turn 73 years old. That's when the IRS requires you to take required minimum distributions, or RMDs, from your IRA, SIMPLE IRA, SEP-IRA, and most other retirement plan accounts (Roth IRAs don't apply)—or risk paying tax penalties.

The RMD age used to be 70½, but following the passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act in December 2019, it was raised to 72. Then, Congress further increased the age to 73 as part of the SECURE 2.0 Act. Required minimum distributions for traditional IRAs and 401(k)s were suspended in 2020 due to the March 2020 passage of the CARES Act, though this suspension has run its course.

Retirees need to take the penalties seriously and start withdrawing funds. If you don't take your RMD, you will owe the IRS a penalty equal to 25% of what you should have withdrawn. So, for example, if you should have taken out $5,000 and didn't, you'll owe $1,250 in penalties. The penalty rate used to be 50% but was reduced as part of SECURE 2.0.

If you're not a big spender, RMDs are no reason to freak out. "Although RMDs are required to be distributed, they are not required to be spent," Charlotte A. Dougherty, CFP, founder and managing partner of Dougherty & Associates in Cincinnati, points out. "In other words, they must come out of the retirement account and go through the 'tax fence,' as we say, and then can be directed to an after-tax account, which then can be spent or invested as goals dictate."

As Thomas J. Cymer, CFP, CRPC, of Opulen Financial Group in Arlington, Va., notes: If individuals "are fortunate enough to not need the funds, they can reinvest them using a regular brokerage account. Or they may want to start using this forced withdrawal as an opportunity to make annual gifts to grandkids, kids, or even favorite charities (which can help reduce the taxable income). For those who will be subject to estate taxes, these annual gifts can help to reduce their taxable estates below the estate tax threshold."

Note that there's a helpful tax vehicle for using RMDs to give to charity: the qualified charitable distribution (QCD). Giving your money according to this method can simultaneously take care of your RMDs and give you a tax break.

As RMD rules are complicated, especially if you have more than one account, it’s a good idea to check with your tax professional to make sure your RMD calculations and distributions meet current requirements.

How Much Can I Expect to Spend in Retirement?

Every retiree will have different circumstances, lifestyles, and events that make some spend more and others spend less. In general, a common rule of thumb is for retirees to plan around 70% to 80% of their annual income when they were working. For example, should a person have earned $100,000 per year before they retired, their lifestyle (assuming it has not dramatically changed and that person does not have significant health considerations) may land around $70,000 to $80,000 per year of expenses including health care and retirement facilities.

What Is the 4% Rule?

The 4% rule is a withdrawal investment strategy where only 4% of balance of all investments are withdrawn each year. This allows a retiree to slowly wind down their investment savings while still earning gains or investment appreciation on the remaining balance.

What Is the 50%/30%/20% Spending Rule?

One popular budget methodology for planning spending is to use the 50%/30%/20% rule. This rule stipulates that 50% of an individuals spending must go towards needs. Then, 30% can be spend on wants, while the other 20% goes into savings. As an individual winds down their career and shifts into retirement, the 20% portion that goes into savings may need to be shifted towards needs, especially considering special housing or medical considerations.

The Bottom Line

You may be perfectly happy living on less during retirement and leaving more to your kids. Still, allowing yourself to enjoy some of life's pleasures—whether it's traveling, funding a new hobby, or making a habit of dining out—can make for a more fulfilling retirement. And don't wait too long to start: Early retirement is when you're likely to be most active.

Article Sources
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  1. Fidelity Investments. "Retirement Savings Assessment 2020: Executive Summary," Page 5.

  2. U.S. Congress. "H.R. 2617—Consolidated Appropriations Act of 2023," Page 831.

  3. Internal Revenue Service. "RMD Comparison Chart (IRA vs. Defined Contribution Plans)."

  4. U.S. Congress. "H.R. 1865 - Further Consolidated Appropriations Act, 2020," Page 623.

  5. Internal Revenue Services. "IRS: Seniors, Retirees Not Required to Take Distributions from Retirement Accounts This Year Under New Law."

  6. U.S. Congress. "H.R. 2617—Consolidated Appropriations Act of 2023," Page 881.

  7. Internal Revenue Service. "Reminder to IRA Owners Age 70½ or Over: Qualified Charitable Distributions Are Great Options for Making Tax-Free Gifts to Charity."

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