For people hurtling toward retirement, the standard personal finance advice is to continue to fund your retirement accounts as aggressively as you can, including taking advantage of catch-up contributions.
Those additional contributions can add up to a tidy sum in retirement, but after age 60, they have fewer years to compound, and the tax deferral isn’t as valuable. If your retirement numbers are in relatively good shape, however, consider these four spending strategies with a positive psychological payoff.
Strategy 1: Get ahead of big-ticket transactions
As retirement approaches, it’s helpful to forecast big-ticket outlays over the next two to five years, like home repairs or improvements or cars you’ll need to replace. If you’re still working, you can fund them out of cash flows rather than putting additional funds into your retirement accounts.
Pushing those big-ticket outlays into your working years has a psychological benefit. That’s because pulling money from your investment accounts can be fraught, especially in the early years of retirement, when you’re still getting your sea legs. That challenge can be especially acute for people who plan to delay Social Security; they’ll be drawing all of their cash flow needs from their portfolios in those years. Spending from working income is apt to be psychologically more palatable.
As you think through what you might want to spend on, lean into your vision of retirement. Will you pursue your passion for cooking? If so, splurging on new counters might be money well spent. If more road trips are in your future, lining up a safe, reliable set of wheels should be a priority.
Strategy 2: Pay down debt
The calculus on prepaying a mortgage usually boils down to which decision provides the better “return”: debt paydown (and the relief from the interest service that accompanies the debt) or investing in something that offers a similarly safe return.
It often depends on the prevailing interest rate environment. Today, many mortgage holders could reasonably earn more on their safe investments than they’re paying to service their debt. Consider liquidity and spending needs too. If paying off your mortgage would require you to crack into your retirement account and trigger a big tax bill, or leave you cash-strapped and less flexible in retirement, you’d want to think twice.
However, mortgage paydown is the ultimate “sleep at night” allocation, especially as retirement approaches, because it helps you skinny down your fixed expenses and adopt a flexible approach to your discretionary spending, which in turn can boost your lifetime retirement spending. I’ve yet to meet a single person who paid off a mortgage and regretted it.
Strategy 3: Build up liquid reserves in a taxable account
You can put as much into your taxable account as you wish, and you can also pull as much out, without strictures. Being able to spend from taxable accounts with minimal tax implications provides the leeway to pursue other worthwhile strategies in the early years of retirement, such as converting traditional IRA assets to Roth, for example.
But don’t overdo your allocations to safer assets in your taxable account. Cash has a low return relative to other assets regardless of where you hold it. You might not even outearn the inflation rate! I like the idea of retirees holding no more than two years’ worth of liquid reserves—CDs, money market mutual funds, and so on—across both taxable and tax-sheltered accounts.
Strategy 4: Splurge
If you’re in your 60s, it’s a good bet you know loved ones who were struck down in the prime of their lives, before they really had a chance to enjoy their retirements to the fullest. So why not lean into the big, fun experiences that you’ve been “saving” for retirement while you’re still working and healthy?
As Jamie Hopkins notes in my book How to Retire, the greater good in this case is that you’re continuing to work and earn an income, thereby forestalling portfolio withdrawals. If taking a few amazing trips a year or buying a vacation home now makes continuing to work more palatable and also helps you feel more comfortable with the splurges, then those allocations are well worth considering, even if they mean you have to pull back on your savings.
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