The Really Surprising Thing People Get Wrong In Retirement — and 4 Steps to Overcome It

Saving money can be difficult. But spending it? That part was supposed to be easy for retirees who've spent decades building up their nest eggs for their golden years.

Yet for retirement savers, the transition from saving assets to living off of them responsibly can be fraught with uncertainty—and is proving to be surprisingly difficult to navigate.

So much so that a full 68% of retirees have not taken money out of their savings beyond what they have to withdraw as part of their required minimum distributions from their 401(k)s and individual retirement accounts.

This finding, based on new research from Ameriprise Financial, runs counter to conventional wisdom, which says that many retirees (especially those who don't properly plan) are apt to spend too freely and will run out of money too soon.

This reluctance to tap into retirement savings doesn’t necessarily stem from a fear of running out of money, though that it is a legitimate concern for many.

In fact, 71% of retirees surveyed by Ameriprise Financial said they think their money will last their lifetime. (The study surveyed 1,000 retirees with at least $100,000 in investable assets when they retired, with the median being $839,000. While the group ranged in age from 40 to 79, more than half of respondents were age 70 and older, and 38% were ages 60 to 69.)

The bigger hang up, it seems, is the complexity of how to drawdown assets, notes Marcy Keckler, vice president of Financial Advice Strategy at Ameriprise Financial.

Just 21% of the survey's respondents said they feel “confident” in that regard. Respondents cited concerns about determining the appropriate portfolio risk, tax ramifications, and the right way to establish a retirement income plan.

No doubt, it’s better to err on the side of being conservative when it comes to tapping your nest egg, especially given all the uncertainties surrounding your lifespan, future healthcare expenses, inflation, and investment returns.

Still, you have to strike a balance, because being excessively and unnecessarily frugal with your nest egg can rob you of a satisfying life in retirement just as much as running out of money will.

The best advice for tapping your nest egg isn’t all that different from building it: Create a budget, follow a financial plan, and do regular progress checks — but not to the point of obsession.

Step #1: Update your budget

Odd are you relied on ballpark estimates to determine how much you needed to save for retirement, and you may be tempted to defer to rules of thumb at this stage of the game. Don’t.

Not only is your budget one of the key aspects of retirement finances you can control, it can help you keep your spending in check while prioritizing the things and activities that give you the most joy. (Read How Do I Set a Budget and Stick to It.)

Step #2: Organize your income and expenses into 'buckets'

Traditionally, retirees have attempted to calculate a safe rate of withdrawals from their 401(k)s and IRAs based on their expected life expectancies, expected portfolio gains, and their total aggregate assets across all their accounts.

Increasingly, experts recommend a slightly more nuanced approach: matching income sources and spending needs.

For example, instead of thinking of your nest egg as one big pool of money, try breaking it into three buckets, one for basic living expenses, one for lifestyle spending, and one for long-term healthcare.

While the specifics of this strategy depend on your expenses, income and assets, many retirees aim to cover their fixed expenses with predictable income, such as from a pension and Social Security.

They then pay for their lifestyle expenses — dinners out, travel, etc. — with their required minimum distributions. And that leaves the the rest of their savings as a backstop against rising healthcare costs or other unpredictable expenses.

Step #3: Keep paying yourself first

Ironically, many retirees ease some of the angst about overspending by continuing to save, albeit in short-term cash accounts. Financial advisors have long recommended that retirees keep plenty of cash in the bank — 12 months to 18 months living expenses is ideal — to cover unexpected costs and weather market volatility.

If you can regularly save a little above and beyond that, even better.

It’s not only reassurance that you’re living within your means, it’s a great way to budget for big-ticket lifestyle expenses, and stress test your budget against rising costs down the road.

Step #4: Consider professional advice

True, high investment management fees can chip away at your savings over time, but a good financial advisor can more than earn her keep if she helps you see the big picture. That means mapping out a sustainable withdrawal strategy that offers you peace of mind, minimizes transaction costs, and optimizes taxes.

After all, these decisions likely weighted heavily on your ability to build a nest egg. The same holds true when it’s time to carefully crack it open.