I’m a Retirement Expert: Here’s the Best Thing To Spend Your Money on
Written by
Angela Mae
Edited by
Zuri Anderson
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Deciding what to buy for your retirement years can be tricky. Should you prioritize investing? Experiences? Or perhaps a little bit of both?
GOBankingRates spoke with two retirement experts, Joel V. Russo, a Life Underwriter Training Council Fellow (LUTCF), and Zach Tekamp, certified financial planner (CFP®), to get their insight into what to spend your money on as you approach or are in your retirement years, and why. Here’s what they said.
Taxes
Taxes might not be the first thing that comes to mind, but what you do now regarding those tax-advantaged accounts can have a huge impact on your retirement.
“One of the items I think needs more attention is spending money on taxes. Believe it or not, most folks’ two biggest assets are a home and their qualified plan — IRA and/or 401(k),” said Russo, who’s also the founder and principal at NJ Retirement Planning, LLC.
“Tax rates are at all-time lows (we all feel they’re too high), but if you look at historical marginal tax rates, they are relatively low. So, it might make sense to look at converting those qualified pre-tax plans to tax-free plans, and maybe it makes sense to do it gradually or in a lump sum, depending upon your situation.”
On whether tax rates will rise or fall in the future, Russo said that many of the people he’s spoken to believe they’ll go up. While there’s no guarantee of this happening, it might inform your retirement planning decisions. Russo suggested speaking with a retirement specialist and an account to plan for this eventuality.
Building a Tax-Free Retirement
No two retirement planning strategies are the same, but for Russo, the best thing he’s spent money on in preparation for retirement is taxes.
“I can say spending my money now on taxes so I can get my money out tax-free in retirement has been the best thing I have spent money on,” he said. “Also, I’d rather pay taxes on the seeds than the harvest.”
Of course, everyone’s situation is different. Some people need those tax breaks now and can’t afford to wait until they retire for those tax-free withdrawals. Others can take a bigger hit during their working years knowing they won’t have nearly as high of a tax liability once they retire and are, in all likelihood, on a fixed income.
You’ll need to weigh your options and see which gets you the most savings — or bang for your buck as it were — now and in the future.
Experiences
Experiences, particularly those with a social component, are often overlooked but they’re so critical to leading a happy, fulfilled life in retirement.
“Research consistently shows that spending money on experiences rather than material goods tends to generate greater happiness in retirement,” said Tekamp, wealth advisor and managing director at Heritage Wealth Management Group. “I don’t think this should come as a huge surprise.”
Retirement is a major lifestyle transition, and the idea that experiences are crucial to long-term happiness isn’t a new one. Tekamp referenced a study by Dr. Thomas Gilovich, a psychology professor at Cornell University, to support this.
“His research found that experiences ‘create more lasting happiness because they provide opportunities for personal growth, social connection and meaningful memories,'” Tekamp explained.
You can find more support for the idea that money spent on experiences like travel and hobbies lend to greater satisfaction, particularly when compared to spending on material possessions, in this 2019 Journal of Consumer Psychology study (co-authored by Gilovich).
But it’s not just experiential spending that lends to more fulfillment. Prosocial spending can, too.
“A study in Social Psychological and Personality Science (2013) revealed that retirees who engaged in prosocial spending reported increased happiness, likely because it strengthens social bonds and enhances one’s sense of fulfillment,” said Tekamp.
“When you envision what your retirement looks like, maybe spend a little extra time thinking through what experiences you will prioritize, and who you want to make and share those memories with.”
Cars Might Be Part of Your Ideal Retirement Lifestyle
“So now we know that spending money on experiences and social interaction gives us the most fulfillment in retirement. But did you know that auto and auto-related spending also has a positive correlation to retirement fulfillment?” said Tekamp.
Sure, the experience of driving a classic car could be enough for some people. But according to Tekamp, it’s not the primary reason.
“The primary reason for the correlation is that buying a classic car gives you a foray into a community of others who like or have purchased classic cars,” he said. “The opportunity for social interaction that otherwise wouldn’t be there is now present. Hence, the correlation to fulfillment.”
Of course, cars won’t be part of everyone’s ideal retirement. They may very well be part of yours — but that doesn’t mean you have to buy the most expensive one out there.
“When you’re thinking about buying things, ask yourself if that thing will enhance your opportunities for social interaction,” said Tekamp.
Whatever those things are, whether they’re experiences or goods, the amount of value they can add to your life is priceless.
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