Things to Consider if You Were Offered an Early Retirement Incentive Package
September 09, 2011Last week I talked about some of the biggest factors that people face when considering an early retirement package. Health insurance issues and determining when to take Social Security were by far the 2 most common topics of conversation. But, they were by no means the only topics of conversation.
Here is another topic that this group of people wanted to discuss, along with my observations of human behavior (based on the last 20 years of talking to people about financial matters).
Spending and my behavioral response to retiring:
Q: Will my spending level go up or down when I stop working? What can I do to make sure I don’t overspend and run out of money late in my retirement period? Do I have to cut my budget back so severely that all I’m eating is Ramen Noodles and cat food after I retire? (An actual question from someone I met!) What have you seen with the spending habits of people who retire, what’s a realistic look at this?
A: Of course, every situation is a little bit different, but I’ve noticed a trend with the spending habits of retirees. Once you aren’t working every day, you have more “free time.” Usually, the things we do with our free time require some cash. So, a lot of people I’ve worked with actually spend more in the first year or two, post-retirement, than they did while they were working. There are a lot of projects around the house, places to go, people to see, hobbies in which to engage, and after a long career, it’s nice to do something “for yourself.” It’s not uncommon to see someone spend 100-125% of their prior spending level right after retirement.
Then, they realize that “hey, this retirement thing is going to last a long time and I’m spending money like I’m in Congress” and that if they continue on this pace, they will run out of money well before they want to! Their response? A slamming on of the brakes, and drastic budget cuts. A “severe frugality” mode hits, and spending is slashed to only the bare necessities, and this can be at 50-60-70% of pre-retirement spending. After 6 months of this, people think “this is no fun!” and they find an equilibrium point somewhere between the “Woo Hoo” and the “starving student” spending levels.
That equilibrium point usually resembles the same kind of lifestyle that people had prior to retirement. Let’s face it; the things we like don’t change magically because we stopped working. If we like sushi, we still like it and want it in our life. If we like traveling, we don’t all of a sudden decide to become a hermit. Our hobbies remain our hobbies, our preferences remain our preferences, we just have more time to spend on the things we “want to” do rather than the things we “have to” do. The old expression, “you can’t teach an old dog new tricks” speaks the truth about how we are wired and how we’re going to behave during retirement. I enjoy sports. When I retire, I’m going to be able to see games at stadiums that I have not visited yet. I’m not going to stop going to games because I retire. In fact, I may plan more trips to cities where I haven’t seen a baseball or football game yet.
The point I’m trying to make here is that our lifestyles won’t change radically after we retire; at least for most people. Exceptions can be found very easily. But if you’re like the majority of people I’ve met over the years, expect to see some variability in your level of spending after retirement. It doesn’t mean you are not “normal.” In fact, it makes you totally normal to me. Like all big events, there is a transition process that everyone has to endure and there’s no way to shortcut the process. You have to live it. If reading this helps you understand what may happen to your budget after retirement, or motivates you to develop a plan to manage your spending levels during retirement, then I’ve accomplished my goal for writing this.