When you retire, your finances take a dramatic shift. Instead of that regular paycheck, you’ll likely find that you’re living on Social Security and maybe a pension, then supplementing it with whatever retirement savings you’ve built.

Known as decumulation, this shift is important. You’ll have limited resources, so you want to make sure your money will last. But many retirees swing too far in the other direction. They leave too much money in their savings, spending conservatively and dying with a large pool of assets they never enjoyed.

Why Aren't Retirees Spending More?

There can be a lot of “unknowns” when it comes to retirement. The biggest one is planning for how long you will live to make sure your savings last. Additionally, combining the uncertainty around market returns, inflation, and unexpected expenses makes it natural for people to be nervous about spending more through retirement.

That uncertainty leads many retirees to err on the conservative side when it comes to spending. You might forgo all those travel plans you had, for instance, or maybe you’ll put off replacing your car or buying a new TV. You delay spending until tomorrow, when your finances will seem more stable, but tomorrow never comes.

Underspending in Retirement

Certainly, not every retiree underspends. It’s an issue that especially affects affluent retirees. But even among retirees at all income levels, retirement savings withdrawals tend to be modest. One strategy, the 4 percent rule, advises retirees to take 4 percent each year from retirement savings to make sure it lasts.

But even though the 4 percent rule can give retirees more confidence there will be enough left, the numbers show retirees aren’t taking that much. In fact, some retirees don’t even take out the amount their portfolios earn each year, leading to a surplus of funds they could be enjoying.

Why Building a Decumulation Portfolio is Important

The best thing about having a strategy is that it puts you in control. A decumulation portfolio balances your investments while also keeping in mind you’re decumulating. You’ll have fewer risky investments and more assets like stocks and bonds that pay off gradually, but reliably. If you haven’t taken a fresh look at your portfolio with your new retirement income in mind, it’s important to do so.

Accounting for Unexpected Costs with a Retirement Planner

One reason many retirees are more conservative in their withdrawals is a fear of future health issues. The Administration for Community Living estimates that someone turning 65 today has a 70 percent chance that they’ll need long-term care at some point. However, this doesn’t mean you have a likelihood of going into a care facility. This could include in-home healthcare covered by your medical plan.

Although medical costs can be a large part of retirement, that doesn’t mean you have to avoid spending money now. It’s important to take a look at your medical coverage and make sure you have enough set aside for any out-of-pocket costs. You can then decide how much of your savings you can reasonably live off of.

Final Thoughts

The future is uncertain for everyone, whether you’re just starting a career or entering retirement. The right financial plan will take into account your unique situation and create an approach that keeps you safe without sacrificing quality of life. Retirable can help you build a personalized decumulation portfolio that will ensure you’re prepared for the coming years, and a good certified financial planner can take that to the next level, creating a budget and spending plan that will work for you.