What it Takes to Truly Enjoy Financial Freedom

Call it what you want: financial freedom, retirement, financial independence, the next chapter, etc. Whatever your version of life after you are no longer required to work for a paycheck, chances are that you share a key concern of people both preparing for and currently enjoying retirement: understanding how much you can safely spend in retirement without risking running out of money.

According to Dr. Michael Finke, a well-respected researcher and professor from The American College, this is the number one reason people hire financial advisors – they want to truly enjoy financial freedom, but they’re not sure what that looks like from a spending perspective.

And if you’re like most of the clients we work with at The Prosperity People, an important factor in your ability to achieve financial independence has been your ability to keep spending in check by mastering the art of thrift. Shifting away from that mentality of saving for the future and toward the need to start spending those savings on purpose can feel, well, kind of weird.

Why it’s so hard to start enjoying the fruits of your labor

Saving money, in our current culture, is a badge of honor, a sign of someone who is responsible, disciplined and cares about themselves and their family’s future. In fact, many of us have come to assign some type of moral imperative to the ability to save money. That means that when we have to spend those savings, even when it’s the whole purpose of the savings in the first place, it can feel a bit like a moral failing.

The risk with this type of money mentality is that you may find yourself skimping on expenses in retirement in order to live solely from guaranteed income sources like Social Security, annuities and/or pension payments. Which can be a valuable skill if those are your only sources of income, or if the market is in a downturn and you’re looking to minimize the need to liquidate any investments for a time.

But beyond that, dipping into your savings to fund a comfortable life in retirement is quite different from when you may have had to do so during your working years, when the need was often driven by something having gone wrong. And newsflash: this mindset doesn’t just go away in retirement, despite the fact that the whole point of saving all those years is so that you can spend it now.

Permission to spend on the things that bring the most life satisfaction

Dr. Finke’s research also confirmed something that you likely already know, but perhaps don’t consider as strongly as you maybe ought to when constructing your retirement spending plan. And that finding is that by a long shot, retirees report that they receive the most life satisfaction from spending money on hobbies, travel, dining out and other leisure activities.

For frugal folks who realize that retirement may also mean that there is a risk of running out of money, it is a natural inclination to want to limit spending in those areas. After all, during our working years, when money is tight, this is where we limit ourselves. And in certain circumstances during your retirement, this may also be true.

However, the greater point is to squeeze the most enjoyment out of those hard-earned dollars, so finding a balance is critical to a happy and rewarding retirement. So how do you know when it’s safe to spend on those more flexible, leisure activities and when you legitimately need to reign it in? Here’s one philosophy that we like.

Finding the perfect withdrawal rate

You’ve probably heard about safe withdrawal rates, like the so-called 4% rule, which is how many financial advisors calculate how much clients can afford to spend each year. However, the perfect rate is up for debate and will vary drastically depending on market conditions in the early years of retirement withdrawals.

So rather than giving you a percentage or set dollar amount that you can draw down each year and then expecting you to fit your spending into that amount, we use an approach that lines your investment allocation up with your spending needs, which may vary from year to year.

That way, when you need that gentle nudge to overcome your thrifty inclination in order to spend a little more on the fun stuff, we can remind you that your investments have been allocated to allow for spending beyond the basics, especially during good market periods.

This is why it’s so important for you to identify your spectrum of spending in terms of flexibility, starting with spending that is deemed inflexible or fixed (utilities, groceries, healthcare, etc.), followed by estimating expenses with some flexibility such as clothing, transportation, holidays and household goods then finally leisure spending, which are those areas you’ll find the most satisfaction.

We use that information to build the best investment allocation for you so that when the market is booming, you can freely spend on leisure activities knowing that if there’s a downturn, you’ll still be able to withdraw enough to cover your other life expenses.

Keeping the bigger picture in mind

One of the reasons we build your Prosperity Plan around your goals rather than stock market predictions and performance is so that you can spend with confidence, regardless of what’s happening in the market. One of Andy’s favorite client projects is to help clients figure out what kind of car they can buy – we are here to help you make those decisions so that it’s not all on you to figure out if you’re unintentionally spending away your legacy.

If you’re not a client of the Prosperity People but you’re wondering how to best put together your financial freedom spending plan, we’d love to talk with you. Reach out today to schedule a chat so we can start you on your path to prosperity.