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Spend it Now or Save it for Later?

The ultimate retirement savings question. 

Earlier this year, BlackRock, an investment management company, issued an update to its 2018 study of how more than 1,500 retirees were handling their retirement savings.  

One of the key findings of the report was that very few retirees want to tap into their savings to finance their spending in retirement. This is especially true of those with high levels of assets, who are very content to leave all or most of their savings unspent. Only one in four believed they would have to spend down retirement investments at all to fund their desired lifestyle.

The respondents were not necessarily federal retirees, but the study highlighted the difference in retirement spending between those who have a pension—such as the government offers under the Civil Service Retirement System and the Federal Employees Retirement System—and those who do not. A pension creates a stream of lifetime income that requires less in personal savings to achieve financial independence in retirement. Those with pension income were more likely to have seen their assets increase and be optimistic about the future, while those without pensions are more likely to have experienced financial anxiety and to have spent down principal to cover monthly living needs.

However, one in six plan to spend more right after retirement when they are healthy,—typically on  travel—and then cut spending later. This strategy reminds me of a financial planner I used to know who called the phases of retirement, the “go-go years, the “slow-go years,” and the “no-go years.” 

But some of the people who participated in the survey plan to curtail spending early in retirement to save assets for later in life, when they fear they’ll have higher health care or long-term care costs. I think some people also now fear that higher rates of inflation might reduce the buying power of the lifetime streams of retirement income, leaving them more dependent on personal savings.

The FERS benefit receives a cost-of-living adjustment, but it’s known as a “diet COLA,” because it goes up by 1% less than the increase in the Consumer Price Index when the index is 3% or more than the previous year. Over a retirement that can last decades, this can significantly impact the value of the benefit. 

Although Social Security benefits receive full COLAs, some argue that the adjustment doesn’t actually keep pace with inflation because it doesn’t reflect the spending habits of elderly Americans. 

How optimistic are you about your retirement? Are you thinking about how you might draw down your Thrift Savings Plan investments? Are you fearful about the prospect of retirement or are you looking forward to living with some degree of financial freedom? If you’re leaning toward the pessimistic side, try these exercises:

  • Instead of thinking you’ll need to work “forever,” figure out what your finances will look like if you work two more years or until age 62. 
  • Instead of saying, “I will never save enough to retire,” try to save 1% more of your salary than you’re saving now, reamortize your TSP loan if you have one to pay it off earlier and set aside an emergency fund.
  • Instead of thinking that retirement is too complicated, attend a pre-retirement training event to learn a few things more than you know today.
  • Instead of being anxious about future “what-if” situations, prepare for them by having a plan B (and C or D, too).

These kinds of small steps can help allay your fears of the future.