What retirement really looks like
On a recent trip to Florida, I had a chance to chat with several retirees who, while generally happy, were quick to admit that the reality of retirement was somewhat different from what they’d envisioned.
While each story was unique, there was one common theme, particularly when it came to how they now spend their time and their money — they have a bit too much of the former, and not quite enough of the latter.
Perhaps you can do better.
There are two basic ways of looking at retirement living, explains Michael Finke, a professor of personal financial planning at Texas Tech University.
One views retirement as a potentially stressful life change. If you try to maintain your environment — your home, city, friends and activities — you’ll be happier in retirement than if you try to break out of your routine too quickly.
Others will tell you that shedding old habits, establishing different routines, meeting new people, and creating a lifestyle that isn’t just normal life without the work is the way to go.
In my experience, a blend of the two is almost always the correct approach — particularly since studies show that a significant reduction in activity is usually associated with lower satisfaction in retirement.
In other words, it’s better to burn out than it is to rust, Finke says.
Like many researchers, he views retirement as a set of transitions that are shaped by physical and mental decline, or the so-called ‘go-go, go-slow and no-go’ stages — each of which have different financial implications.
Most people start out retirement in good health and make the most out of it by travelling and enjoying life to its fullest.
At some point though, they begin to slow down as their bodies and minds become less capable of handling more vigorous activity, finally reaching a stage where they become more dependent on others in their later years.
Studies of spending in retirement are consistent with this idea of a staged retirement, according to David Blanchett, head of retirement research at Morningstar.
While there's often an initial spike in consumption when people retire, that generally tapers off, he maintains. In most instances, in a pattern that he labels the ‘retirement spending smile,’ expenditures actually go down with age.
The fact that people end up spending less doesn't necessarily mean they wanted to spend less, however. It may very well mean that they simply had less to spend to begin with.
Researcher Michael Kitces has long argued that a household's level of wealth is the major factor in whether living expenses actually go up, down, or stay the same as people age.
Oddly enough, more wealth often means greater spending cutbacks later in retirement, he maintains.
That's because discretionary expenses like extensive travel or buying a boat eat up a bigger share of the budget for higher-income households than those that have less to work with from the outset. And it’s that type of spending that tapers off eventually.
But those who expend much of their income on basic needs like housing and food — which tend to decline little, if at all, in those later years — will likely see less of a drop in their overall spending rates as they age, he believes.
Despite this, retirees with lower income and fewer skills still score high when it comes to measured happiness, Finke says.
Their more modest circumstances fit well with the brain’s ability to simulate satisfaction with one’s current condition. In other words, they’re satisfied with their lot, content to fish off the pier rather than the yacht in the harbour.
He also thinks the way people get paid in retirement makes a difference, noting that most retirees really like annuitized income.
Studies suggest that while the amount of satisfaction retirees receive from government programs and other pension income is fairly similar, it’s far higher than that which they receive from other sources of income.
For instance, those who rely solely on defined contribution plans to generate their retirement income are typically significantly less satisfied with retirement.
When you decide to retire, buy into it as a new lifestyle, Finke suggests. And the best way to do that is to develop your hobbies and friendships while you’re still working, not later.
As to finances, finding or holding on to a job that will provide you with some sort of pension should be an ongoing priority, he adds.
Got a question about investing, saving or retirement? Send Gordon an email and we might answer your question in a future column.
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