Learning to Live Without a Paycheck

One retirement truism I can personally vouch for is that once you give up the security of a steady paycheck, you’re exposed to a host of uncertainties: interest rate moves, stock market corrections and tax changes, to name a few. To hedge against things that are out of my control, I’ve elected to wait till age 70 to collect Social Security benefits as well as to take my pension as an annuity rather than a lump sum, both of which will maximize my regular income.

The latter is a popular strategy among Kiplinger’s readers. “I totally underestimated the value of a guaranteed income stream,” writes Bill Kleine. To create one for himself, Kleine converted a lump-sum payout from a former employer into a simple fixed annuity. Another reader converted a whole life insurance policy into a fixed annuity. (For more on this and other income ideas, see Make Your Money Last Through Retirement.)

To protect against potentially higher future tax rates, Dennis Kelly is withdrawing more than his required minimum distributions to take advantage of today’s relatively low rates. David and Janet Dennison are making charitable contributions from their pretax accounts to reduce the amount they’ll be required to take in RMDs when they turn 70½, which will also cut their tax bill.

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When the stock market hit bottom in 2009, Mike Hagedorn began putting $1,000 a month into a bank CD, later upping that to $2,000. Now he’s sitting on a six-figure cushion to protect against market downturns.

Too frugal? To preserve his savings, Del Richter is planning to use an ultraconservative 2% annual withdrawal rate instead of the traditional 4% benchmark. But Richter may be playing it too safe. Wes Moss, a certified financial planner (CFP) in Atlanta, recently took an updated look at the 4% rule and found that it’s still valid. In 70% of Moss’s scenarios, retirement funds lasted 50 years or more, and in the worst-case scenario, the money ran out in 29 years.

In fact, there’s a lot of evidence that retirees may be worrying too much about preserving their money. A recent study by the Employee Benefit Research Institute found that people are reluctant to dip into their assets, often spending down significantly less than half of their savings within the first two decades of retirement—and sometimes even increasing their nest egg (see Retirees, Go Ahead and Spend a Little More).

One reason is that retirees are self-insuring against potentially catastrophic expenses. Nevertheless, says EBRI CEO Lori Lucas, “they’re living sub-optimally, not spending money even though they could be.”

How to overcome their fear? Sometimes the solution is to put into place a financial plan “that gives you permission to spend,” says Brian Sykes, a CFP in Blue Bell, Pa. Sykes also recommends maintaining separate accounts for things such as basic bill-paying, travel and investment.

But frequently the spending barrier is mostly psychological. For years you’ve been saving regularly, and now you have to create a new habit by training yourself to do what doesn’t come naturally, says financial therapist Olivia Mellan. Her advice: “Practice spending your money, and reward yourself for the experience.”

Readers Bill and Betty Smith had been reinvesting RMDs in stock mutual funds, but this year they decided to have the money sent to a checking account instead “to motivate us to travel more,” says Bill. Paying for a family Mediterranean cruise was “a wonderful perk for those years of frugality.”

Kathy Comfort’s spending rewards are smaller but no less satisfying. She has created what she calls her wow bucket, which holds about two dozen slips of paper on which she has written “things that bring joy to my life”—everything from fresh flowers to a new pair of leather boots. Every two weeks, she pulls out a slip and buys what’s written on it. Says Comfort, “It gives me permission to treat myself.”