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Thinking about buying an RV, a new boat, or taking on a major home renovation in retirement? Or maybe you want to drop thousands on a bucket-list trip or finally treat yourself to the high-end pampering you never had time for when you were working.
Who could blame you? You’ve spent decades saving for your golden years and shouldn’t feel guilty about spending the wealth you worked so hard to accumulate.
Yet, far too many retirees choose not to splurge, paralyzed by the fear of outliving their money. They see inflation ticking up or gas prices soaring and immediately pull back. It doesn’t matter if they have a solid financial plan to weather economic shifts; fear sinks in, and the spending stops.
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Instead of upgrading their homes or traveling the country, they push back their dreams, only to end up with a massive bank account and a whole lot of regret. By the time they finally feel safe spending money, they are often too old, sick or tired to enjoy it.
That was the case for one of financial adviser Eric Ludwig’s past clients. The couple always wanted to go on a Viking cruise, but when they finally decided to do it in their early 80s, they had to cancel due to health issues. “Nobody wants to be the richest person in the cemetery,” says Ludwig, who is also director of the American College of Financial Services Center for Retirement Income.
Granted, splurging in retirement isn’t without risk. Pulling funds from the wrong retirement account can trigger a hefty, unexpected tax bill or derail your portfolio’s compounding power. Miscalculate your math, and you could face a genuine shortfall down the road.
But you shouldn’t let what-ifs keep you from enjoying your life. If you can confidently answer the following three questions, nothing is stopping you from splurging on the retirement you’ve earned.
If you can answer yes to the following three questions, go ahead and splurge!
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1. What is motivating the splurge?
You may think the first question would be: Can I really afford it? But Ludwig says even before that, you have to understand what is driving the need to spend the money.
“A splurge is an emotional decision that is wearing a financial costume. Your job is to separate the two before you spend a lot,” said Ludwig. Ask yourself: “What is this really for? What will you get out of this?”
Ludwig posed that question to a couple he advised who were looking to sell their house and build a new one, versus buying a less expensive already-constructed home. The couple insisted that the move was motivated by wanting to be closer to family. With plenty of homes available to purchase, Ludwig pressed them on why they preferred new construction, which costs a lot more.
It eventually came out that the real motivation was to impress a family member in the area. Once the couple realized that, they changed course. “They ended up buying a house that was $100,000 less than the one they were selling,” said Ludwig.
2. What am I sacrificing for the splurge?
Assuming you can afford your splurge, the next question you need to ask yourself is: What are you sacrificing for it? If you plan to spend a large sum of money, will it mean something else has to be put on hold? If so, does it matter?
The couple who decided to buy instead of build a new home realized that all their money would be tied up in impressing a family member, leaving limited funds to travel and pursue their other retirement activities. That was the deal breaker for them.
“That’s something I want my clients to think of when considering a large splurge,” said Hillary Stalker, a financial advisor at CapWealth. “Are they sacrificing something else they want in order to do that?” If they aren’t willing to sacrifice, then the splurge item isn’t as important as they may think, she says.
3. How will I fund the splurge?
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Once you know why you’re splurging and that it’s worth it, the final question you need to ask yourself is: Where will the money come from? If you aren’t careful, a major withdrawal can trigger an expensive domino effect of taxes and clawed-back benefits.
That’s because when you pull funds to pay for a splurge, the tax hit depends on the type of account you use. If you withdraw from a traditional IRA or 401(k), it will be treated as ordinary taxable income. A big splurge can easily push you into a higher tax bracket.
Plus, if that withdrawal spikes your income high enough, some of your Social Security benefits may be taxed, and you could face expensive surcharges on your Medicare premiums.
Don’t be afraid to spend
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Watching your regular paycheck disappear is a psychological hurdle that takes time to overcome, especially when a thirty-year retirement lies ahead.
But if you can afford it, have a solid plan to navigate inflation and market volatility and can confidently answer the three questions above, you can splurge guilt-free.
Editor’s note: This article is part of an ongoing series looking at three questions to ask yourself before making a major financial or lifestyle decision. The other stories in the series are: 3 Questions to Ask Before Deciding if a Roth Conversion Is Right for You, 3 Questions That Reveal If You’re Actually Ready to Age in Place, 3 Questions That Determine If You’re Actually Ready to Retire Early, 3 Questions to Ensure Your Retirement Nest Egg Is Inflation-Proof, 3 Questions to Ask Before Unretiring and 3 Questions That Help You Find Your Perfect Social Security Claiming Age.