The Psychological Journey From Saving to Spending & How to Make a Successful Transition

Here is a version of a question that I hear all the time…

"How do I switch 180 degrees in a short space of time to become a spender not a saver"?

Does the below sound familiar to you?

For decades, Michael and Susan had meticulously planned for their retirement, funnelling a portion of their earnings into their pensions and savings accounts, guided by the vision of a secure future. As retirement neared, their focus, which had long been on accumulation, was required to shift towards spending their well-earned savings. This transition wasn't merely financial; it was profoundly psychological, challenging their long-held beliefs about money and self-worth.

This narrative encapsulates a significant psychological journey faced by many retirees. Transitioning from a saving to a spending mindset involves overcoming deep-rooted fears and biases about your money.

In this blog I delve into the psychological aspects of this transition, offering insights and strategies to help you navigate this complex phase.

Psychological Challenges of Transitioning

1. Loss Aversion and the Fear of Running Out

Loss aversion, a concept identified in behavioural economics, suggests that you will feel the pain of losing money more intensely than the joy of gaining it. This principle can make spending your money feel counterintuitive. A study by the Behavioural Insights Team in the UK highlighted how loss aversion impacts retirement decisions, making individuals overly cautious about spending their pension pots (Behavioural Insights Team, 2018). This ultimately has meant that on average at age 90 people still have c70% of their starting wealth still left!!

2. Identity and Self-Worth

Your identity is closely tied to your profession or ability to earn. A report by the Mental Health Foundation (MHF) found that retirement can trigger a loss of identity and self-worth for some, as they move away from their earning years (MHF, 2019). This shift can exacerbate the difficulty of moving to a spending mindset, where you will no longer see yourself as an earner but as a spender.

Strategies for a Successful Psychological Transition

1. Embrace a New Identity

Retirement is an opportunity to redefine your identity beyond professional achievements or financial success. Engaging in hobbies, volunteer work, or even part-time consultancy can provide a sense of purpose and fulfilment that money alone cannot offer.

2. Understand the Role of Money in Happiness

Research by the University of Cambridge found that how you spend your money can have a significant impact on your happiness. Investing in experiences, such as travel or learning new skills, rather than just accumulating goods, can lead to greater satisfaction in retirement (University of Cambridge, 2020).

3. Develop a Flexible Spending Plan

A flexible spending plan that accounts for both the need to manage the unknown of how long you are going to life for (longevity risk) and the desire to enjoy retirement in your go-go years (regret risk) can help alleviate financial anxiety. Income strategies such as bucketing, time segmentation and guardrails can ensure your money is located according to your needs, give your money a job and adjust withdrawals based on market performance and spending needs, which all means a more comfortable transition from saving to spending.

4. Seek Social Support

Discussing fears and plans with friends, family, or work colleagues who are going through or have gone through a similar transition can provide valuable insights and emotional support. Support groups or retirement planning workshops can offer a space to share experiences and coping strategies.

5. Consult with a REAL retirement planner and coach

Retirement focused planners and coaches can help address the emotional and psychological aspects of money management. They can provide strategies to overcome fears related to spending and help retirees reconcile their financial habits with their retirement goals.

Conclusion

The transition from saving to spending in retirement is not just a financial adjustment but a significant psychological journey. It requires you to confront and overcome deeply ingrained beliefs and fears about money. By redefining your identity, understanding the true sources of happiness, adopting flexible spending plans, seeking social support, and possibly consulting with a REAL retirement planner you can navigate this transition more smoothly.