How to live it up in retirement, without burning through savings

retirement spending guilt

My husband and I are planning to retire this year and want to enjoy retirement. We do not want to skimp on simple pleasures and die with lots of money in the bank. But we also don't want to run through our savings too soon. So how do we calculate withdrawals from our nest egg to spend as much as possible of our assets before we shuffle off this mortal coil? --E.S.

You'd think that having a great time spending all the money you've socked away for retirement would be a cinch. After all, the whole point of saving and investing in 401(k)s and other retirement accounts during your working years is to enjoy yourself after calling it a career.

But a number of recent studies suggest that many people may have a harder time spending down their retirement nest egg than you may think. For example, a 2016 study of retiree spending habits found that with the exception of those of modest means, retirees on average were spending less then they could actually afford, while wealthy retirees were spending less than half of the amount their savings and other resources would support.

And last year when researchers for the BlackRock Retirement Institute examined the spending and savings of thousands of people who retired in the early 1990s, they not only found that most of these retirees still had at least half of their retirement savings remaining after nearly 20 years of retirement, but that many actually had a larger nest egg than when when they entered retirement.

There can be several explanations for this seeming reluctance to spend down one's savings. Some retirees, especially those with considerable amounts of money tucked away, may plan on leaving a portion of their savings to their heirs or charity. Many are no doubt being cautious because they fear they'll incur large medical expenses late in life or that they'll run through their savings too early and have to scrimp in their dotage.

But others may simply have trouble making the transition from saving to spending. After years of thrift, they have developed an extreme reluctance to spend, or a condition I've dubbed "Spendaphobia," which makes it difficult for them to loosen their purse strings and enjoy the benefits of all those years of saving for the future.

Related: A 3-step plan to a secure retirement

Which brings us back to your question: How do you improve your chances of spending so that you enjoy your time in retirement as much as you can, yet not overdo it and jeopardize your financial security or even outlive your nest egg?

The best way to start is by doing a full-fledged retirement budget, as this will give you a sense of what your actual expenses will be after you retire and how much you'll have to spend to maintain your current standard of living. You can create such a budget by going to an online tool like BlackRock's Retirement Expense Worksheet, which allows you to enter upwards of 50 expense items in eight broad categories that cover both essential (housing, health care, food, transportation, etc.) and discretionary (entertainment, charitable contributions, whatever) spending.

You won't be able to predict your spending with 100% certainty (although, if you do some lifestyle planning, or giving serious thought to how you'll live after you retire, you'll come away with a more accurate estimate than if you just wing it). But the idea is to do the best you can and then refine your estimates as you near and enter retirement.

Once you have a decent idea of how much you'll need to spend (at least initially), you'll want to gauge whether Social Security, any pensions and draws from your savings will be able to support that level of spending. You can make that assessment by going to a good retirement calculator like T. Rowe Price's Retirement Income Calculator.

You enter such information as your age, current income, the current value of your savings and the amount you expect to receive from any pensions and Social Security (the tool will automatically estimate your payment or you can go to Social Security's Retirement Estimator). The tool will then estimate the chances that your savings will be able to generate enough income (after taking Social Security and any pensions into account) for the rest of your life to support your desired level of spending. (If you plan to leave assets to charity or heirs, you can earmark that amount and exclude it from the analysis.)

To feel reasonably secure that you won't outlive your savings, I'd think you'd want to see an estimate of 80% or better that your savings will last a lifetime. Generally, if you start with an initial annual withdrawal equal to 3% to 4% of savings -- or $30,000 to $40,000 for a $1 million nest egg -- and then adjust that amount each year for inflation to maintain purchasing power, you'll likely come in close to that 80%-or-better target.

If the tool estimates a success rate much lower than that, however, you may want to revise your planned spending down a bit. Conversely, if the chances of your savings supporting you the rest of your life come in a lot higher than 80%, you might consider spending some more.

But whatever level of spending you start with, you need to be ready to adjust it up or down as conditions change. For example, if your nest egg's value declines sharply because the financial markets take a big hit as they did during the 2008 financial crisis, you may want to forgo an inflation increase or even scale back your planned withdrawal to avoid running through your assets too soon.

If, on the other hand, your savings balance begins to balloon because the markets are churning out well-above-average gains, as has been the case in recent years, you may want to splurge a bit and boost your spending so that you don't end up with a big pile of assets late in retirement along with regrets you didn't spend more early in retirement when you might have enjoyed yourself more.

By making such adjustments and periodically re-visiting a retirement income calculator throughout retirement with updated information about your savings balance and planned withdrawals, you should be able to get a sense of whether you're spending down your nest egg at a "Goldilocks" pace, i.e., not too fast but not too slow.

Related: How much income will you actually need in retirement?

One more thing you can do to boost your odds of having a happier and more rewarding retirement is spend in ways that have been shown to generate more satisfaction and happiness for retirees.

When Michael Finke of The American College and other researchers looked last year at the spending habits of some 1,500 retirees, they concluded that only one type of spending predicted retirement satisfaction -- namely, the money they spend on leisure activities, including travel, entertainment, dining out and hobbies. Finke believes such spending tends to boost happiness because it keeps us more active and socially engaged. (For what it's worth, Merrill Lynch research has found that seniors who give back in some way, whether volunteering or contributing to organizations whose values and aims they support, were more likely to say they were happier and had a strong sense of purpose in life.)

Neither I nor anyone else can offer a spending formula or specific withdrawal percentage that will guarantee you won't run through your savings while you're still alive and kicking while ensuring that you won't leave behind any more money than you wish. There are too many uncertainties -- how the markets will perform, how long you'll live, how your spending needs might change, etc. -- for such guarantees.

But if you start with a level of spending that's reasonable, monitor and adjust your outlays as you go along and to the extent possible direct your spending to areas that have the highest happiness payoff so to speak, you should be able to enjoy retirement and get the most out of money you've managed to save.