Here’s some advice you don’t expect to get every day from your financial planner.
Go spend some money.
We have a lot of conversations with clients about how long their money needs to last, and what amount is safe to spend each year without running out too early.
But there’s another side to the story, and that’s helping clients use their money to live the life they’ve always wanted.
Sometimes, they just need a little push to remodel the kitchen or plan that European river cruise they’ve been dreaming about. Or, it may be just a little splurge, like getting a nice new pair of shoes at Nordstrom.
But how do you know when is it the right time to spend, or alternatively, sock it away under the mattress? Here’s 4 guidelines professionals like us use to help clients make that spend vs. save decision.
Are you on track when it comes to retirement savings? If you’re working, you should be saving 10% to 15% of income each year. We use special assets-to-income ratios to determine whether you’re up-to-speed on saving or whether you’ve already missed the boat. If you follow the rule of “pay yourself first” and have already saved your quota for the year, you’re ready to party. If not, you’re grounded.
Do you hear the clock ticking? We all have to balance the goal of not running out of money with the desire to do things while we still can. If your dream is to hike the Appalachian Trail, it’s probably easier to do so while you’re still young and spry (although – true confession – while struggling to hike down a gorge in Crete last year, I crossed a post-retirement European couple nimbly hiking up. Embarrassing.). Don’t put things off too long, especially the more physically demanding items. Not to sound morbid, but the recent passing of icons like David Bowie, Alan Rickman, and Glenn Frey, all in their late 60s, should be a wake-up call.
Is it on the list? We always say we can divide a room right down the middle. Half the people are super savers, and we have to twist their arm to get them to spend. (You know who you are. Starting booking that trip to Alaska). The other half is blowing through money like there’s no tomorrow, and they face the very real threat of not being able to pay their bills when they’re older. Both groups need to focus on spending more mindfully (as opposed to mindlessly). At the start of each year, sketch out a budget for special items like travel, entertainment, home improvement, or whatever is on your bucket list. Write down how much is available to spend, and before the end of the year, spend it. Not a penny more, not a penny less.
Are you already over budget? We counsel retirees to not withdraw over 4% of the market value of their portfolio each year. So if you’ve already spent 8%, and want to redo your pool, I would probably advise you to wait until next year. It’s OK to overspend a little bit once in a while, but chronic overspending, especially in a challenging market environment, can be very harmful to your financial health. Still working? Go ahead and spend if you’ve already met your retirement savings target (see Rule #1), and you can pay the bill off completely before year-end.