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I have to confess that one of my small pleasures in retirement is treating myself to lunch while I’m out running errands or doing my afternoon activities. No table service, just a coffee shop or a fast casual place. I always bring a book and settle at a table to spend an hour or so reading without being distracted by chores I should be doing at home.
I usually spend $10 to $15 — not a lot, but enough to make me feel a little guilty about not having a sandwich at home.
But it turns out that there’s no need for me to feel sheepish. “Don’t sweat the small stuff,” advises Christine Benz, director of personal finance and retirement planning for Morningstar. “Just set a worry-free number and give yourself permission to spend an amount on small purchases that you enjoy.”
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After retirees have spent a lifetime accumulating savings, one of their biggest hurdles is overcoming their reluctance to spend their money. And the obstacle is both financial and psychological.
To feel comfortable financially, the best starting point is to come up with a budget, even if you’ve never had one before. It’s critical to know how much income you’ll need to cover basic expenses and how much you’ll need for the fun stuff.
If you’ve set aside a certain amount of money for travel, for example, “you’ve given yourself permission to spend that money, and you don’t have to agonize over every trip,” says Elizabeth Zelinka Parsons, author of Encore: A High Achiever’s Guide to Thriving in Retirement.
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Once you have a handle on your expenses, you can figure out how much income you’ll need in retirement. “I like the idea of matching guaranteed spending with guaranteed income,” says Benz. That would include such things as your Social Security benefits, possibly a pension, income from part-time employment, a plain-vanilla fixed-income annuity, or a steady “paycheck” from your investments.
The traditional guideline is a conservative withdrawal rate of 4% annually, adjusted for inflation, but Benz thinks that can range up to 6% if you feel comfortable being flexible. She is partial to the bucket strategy, in which you hold eight to 10 years’ worth of withdrawals in cash and high-quality bonds and the rest in stocks.
If you are a do-it-yourself investor, this could be an opportunity to have a second set of eyes take a look at your plan, especially the tax consequences of withdrawals. “Taxable brokerage accounts are getting taxed every year anyway, so that should be your first line of defense,” says Benz. “Roth accounts are at the other end.”
Think outside the bank.
Having your financial ducks in a row should make you feel more at ease about spending your money. But the bigger question to ask yourself is what your money represents besides security, says Parsons.
“Cash that’s just sitting in a bank is the least interesting version of money,” she says. “It only has meaning when you unlock it, so think about what you want to use it for.” Besides travel, that could be going back to school, pursuing activities you haven’t had time for, helping your children financially or educating your grandchildren.
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Estate planning is also a factor. “I’m a big fan of lifetime giving instead of a bequest,” says Benz. “It’s a wonderful way to see your money at work during your lifetime with family members or a favorite charity.”
What if you’re concerned about needing your money for long-term care or some other catastrophic expense? “If you’ve made a series of solid judgments throughout your life, there are levers you can pull,” says Parsons.
You could redeploy your travel budget, for example, or tap your home equity. “Catastrophes don’t fall from the sky,” she says. “You can evolve a strategy in an intelligent way.”
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.