After decades of hard work, new retirees with tons of free time to enjoy may feel the urge to splurge kick in, from shopping and meals out to that long vacation that they can finally take. Almost half of households actually spend more money in the first two years of retirement than while they were working, according to the Employee Benefit Research Institute.
However, that can be a problem if they actually want to stay retired.
The budgeting skills that let people afford to retire in the first place are just as important post-retirement, which is something retired UPS driver George Horsey, 68, well knows. Horsey barreled down U.S. highways for 43 years. "I loved it! If you like to drive, it’s probably the best job in the world.”
Horsey is one of those everyday Americans who worked hard, made some smart money moves — including investing a portion of his 401(k) into annuities during the last economic decline — and kept his spending in check. In 2013, he was finally ready to retire.
“Having a spending plan has helped tremendously,” says Horsey. After reading that the wealthy don’t have a budget, but a spending plan, he viewed his finances differently. “Now I know how much money I have to allocate toward expenses and I try to live within that amount as much as possible.”
Setting financial priorities early on and controlling spending was key, Horsey says. Here's what he and experts say you can do to avoid splurging too much in retirement.
Digest what’s really happening. You’ve worked for 30 or 40 years and suddenly, no one expects anything from you. “My first recommendation is to give yourself permission to not know what you want to do next,” says Malcolm "MJ" Harris, CEO of the National Care Financial Group in Washington, D.C. It’s akin to people who suddenly win a multimillion-dollar lottery jackpot. “Give yourself a finite amount of time, say one year, and tell yourself: ‘I will only spend X amount of money,’” says Harris. Remember, women and men are living longer, so it makes sense that this "pot of cash" has to stretch 30 years or more.
Factor in your lifestyle vs. your income. Horsey always had a good grip on his finances because he forecast how much he would need to retire comfortably. “If you work a lot of overtime like I did, you never really worked a regular 40-hour workweek and received a ‘normal’ paycheck, so you can experience sticker shock in retirement,” he says. To avoid overspending, factor in how you want to live, where you want to live, and the things you like to do. “The key is to write a budget and track it monthly. If your income in retirement declines by 20%, then reduce your expenses by the same amount,” explains Harris.
Spend your time, rather than your money. With people working longer and enjoying better health these days, retirees can devote more time to causes they care about. “A lot of organizations are eager to work with volunteers who can contribute their expertise on a much higher level,” says Carlos Arias, CFA, a financial services representative in New York. Consider working with organizations like Habit for Humanity, The Red Cross or SCORE, a non-profit that helps small businesses get off the ground, or offer your time to local organizations. For his part, Horsey, a self-proclaimed DIY guy, likes to work with his hands and do carpentry projects around the house.
Expand your knowledge base. More than 84% of community colleges have programs for those who are 50 and older, according to the American Council on Education. “Community colleges are extremely reasonable in terms of cost, and you can take courses that you always wanted to learn more about, whether it’s literature, poetry or even dance,” Arias suggests. What’s more, staying active not only expands your mind but also diversifies your social circle and helps to offset some of the isolation that retirees can experience.
During the last few years of his career, Horsey, knew he would have to eventually come in off the road. Now he fills his time caring for his 93-year-old mother, going sport fishing with buddies and traveling with his wife.
“By managing my money well, I can do the things that I enjoy most in retirement,” he says.