I’m a Financial Advisor: Here Are the 5 Best Ways I See Retirees Spend Money
Written by
Jamela Adam
Edited by
Carly Brashears
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After decades of squirreling away money for your golden years, you may feel anxious about the thought of spending your nest egg during retirement. According to 2022 data from the Bureau of Labor Statistics (BLS), the average annual expenses of those 65 and older were $57,818, or $4,818 per month. In places with high costs of living, this number may be even higher.
If you’re worried about depleting your savings prematurely during retirement, consider strategic ways to spend your money to stretch it further. Here are some smart ways Laura Redfern, certified financial planner and certified financial transitionist at ShadowRidge Asset Management, LLC, has seen her clients spend their money during retirement.
Continue To Let It Grow
“Retirement means your investment strategy may need adjusting, but it doesn’t mean it should be abandoned altogether,” advised Redfern. “My smartest retiree clients don’t put everything in cash — and that includes the proceeds from pensions or annuities. They know their investments need to keep up with inflation, which is why they still keep them invested after retirement.”
One frequently used rule of thumb for retirement spending is known as the 4% rule. It’s quite straightforward: You add up all of your investments and aim to withdraw no more than 4% of that amount in the first year of retirement. Then, adjust that percentage every year to account for inflation.
Use a QCD for Their RMDs
Another smart way Redfern has seen her clients spend their money in retirement is using their required minimum distribution as a qualified charitable distribution. A qualified charitable distribution (QCD) allows retirees who are 70½ years old or older to donate up to $105,000 total to one or more charities directly from a taxable IRA instead of taking their required minimum distributions.
“If a retiree is charitably inclined (and especially if they’re making annual donations to a charity anyway), using their required minimum distribution as a qualified charitable distribution can be a win-win,” said Redfern. “This way, the retiree can satisfy their annual minimum distribution requirement, the retiree also doesn’t pay taxes on the distribution, and the charity gets a tax-free donation,” she explained.
Spend It!
“I had a pair of clients who purchased a camper upon retirement and spent the next five years traveling around U.S. national parks,” Redfern said. “They were realistic about the fact that doing that in their 80s probably wasn’t going to be feasible, so they went for it in their 60s.”
She explains that financial planners and advisors sometimes refer to this as the “go-go” years in the “stages of retirement” and that retirees who go for big life goals during the first years of retirement report fewer regrets than those who are fearful.
However, embracing your “go-go” years doesn’t mean you should spend mindlessly without a realistic plan or budget awareness. To get full enjoyment and satisfaction out of those years, connect with your “why” and keep that in mind as you spend.
Contribute To Education Savings Plans for Grandchildren
“Contributing to education savings plans for your grandchildren has always been a wise move I’ve seen my clients make during retirement, but recent changes to how 529s are treated have made this an especially smart thing for retirees to do,” Redfern said.
Starting in 2024, 529 funds can now also be partially rolled into a Roth IRA for the child — free of income tax or tax penalties — if the child doesn’t end up needing the funds for college. This has made 529 plans even more attractive to retirees who place a high value on education.
“Plus, contributing to a 529 plan for a grandchild doesn’t affect need-based financial aid eligibility on the updated FAFSA,” Redfern said. “Some call this The Grandparent Loophole.”
Spend Money on a Roth Conversion
Another strategic move Redfern has seen retirees make is to spend money on converting tax-deferred accounts to Roth accounts so they can leave a tax-free gift to loved ones.
“Leaving a tax-deferred account to a loved one has the potential to create big, unintended tax issues for them, depending on the circumstances,” she explained. “Smart retirees will take a look at the cost of converting tax-deferred accounts to Roth accounts and do the math on how this may affect the next generation, especially if the next generation is already in a higher tax bracket.”
So, if you have the bulk of your retirement money parked in tax-deferred accounts like a traditional 401(k), but you realize you won’t need that entire nest egg during your lifetime, consider a Roth IRA conversion to leave more wealth for your heirs. If your heirs receive a traditional IRA or 401(k), they owe taxes at ordinary income rates on the distributions. However, they generally won’t pay taxes on inherited Roth IRA distributions.
Spend Wisely for a Stress-Free Retirement
Your golden years are your time to kick back, explore hobbies, and check off all the bucket list items you’ve been dreaming about. But to make these good times last, you must be mindful of your spending habits and have a budget in place. If you haven’t already, consider meeting with a financial planner who can help you map out the best course of action to achieve or maintain financial freedom in retirement.
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