When you retire, the income you receive is likely to be based on a careful assessment of your assets, an analysis of your planned expenditure, and a recognition of how long your funds will need to last.

Through this, you’ll get an idea of how much you have to spend and be able to plan to avoid depleting your funds.

It’s unlikely you have given much thought, if any, to the reverse scenario of underspending.

However, this could create problems for you, and in this article, you can read why it’s important to find the right balance between overspending and not spending enough.

Retirement necessitates a change of mindset

Retirement involves a switch from a saving mindset to a spending one.

This is often driven by an awareness that you no longer have the comfort blanket of a regular salary and will instead be using your accumulated wealth – pension fund and other assets – to provide you with an income.

Clearly, you will need to take steps to avoid overspending, as having to adjust your lifestyle to reflect a lower income than you may have planned for is something you will want to prevent.

You will also want to be aware of other financial issues, such as potential care costs, and ensure you have an investment strategy to maintain income to live comfortably.

With careful planning and a robust retirement income strategy, you will be able to remove the fear of overspending through knowing that your plans have been carefully structured to mitigate the possibility of this happening.

However, it’s also worth giving some thought to the possibility that, rather than spending too much, you actually don’t spend enough.

3 reasons why you may underspend in retirement

Having worked so hard until stopping retirement, it’s important to ensure that you spend enough to live comfortably and not go without pleasures you can actually afford, but perhaps don’t believe you can.

Effective planning can help reduce the chances of this happening. So, it’s good to be aware of some of the common reasons why you may feel that you should opt for a frugal lifestyle.

These could include:

1. The fear of outliving your accrued wealth

While you don’t know how long your retirement funds need to last, longevity data published by the World Health Organisation would suggest that, if you retire in your early 60s, your retirement could last for up to 30 years.

A robust plan will give you the peace of mind that you are drawing a sustainable income.

Reviewing your plans and financial circumstances regularly can also help identify potential red flags, allowing you to adjust them as needed.

2. The desire to leave a substantial legacy for your family

It’s natural to want to give your beneficiaries the best possible chance of living a comfortable life by leaving them a substantial legacy when you pass on.

In reality, however, your children would likely be alarmed to learn that you were putting their inheritance over your own quality of life in retirement.

Again, careful planning can strike an appropriate balance between leaving a sizeable inheritance and enjoying a rewarding, happy retirement.

3. The potential of future care costs

There’s no doubt that the cost of long-term care can be prohibitive and could act as a disincentive to spending in retirement.

While it’s clearly important to plan for this, especially if you have underlying health issues that could require care, you should also be aware that care packages can vary.

There’s a big difference in the costs of a nursing home and a domiciliary care package in your own home.

However, with effective retirement income planning, it should be possible to allay any fears you may have about not being able to afford future healthcare costs.

Differentiating between good and bad spending

A good way to help reduce the chances of underspending in retirement is to have a clear idea of the difference between good and bad spending.

“Bad spending” can upset your long-term plans and even threaten your future financial security. Examples could include impulsive, substantial purchases and spending on items you think you ought to have rather than actually need. It can also include erratic or anxiety-driven investment decisions, leading to potential losses, which underlines the importance of having a detailed investment plan and sticking to it.

Read more: Why passive investing is hard for decision makers (and how to get used to it)

By contrast, good spending is the kind that enhances your quality of life and sense of wellbeing.

Examples include:

• Spending on your health and fitness, as well as preventive healthcare, which can help reduce the risk of major expenses later on
• Home improvements that can enhance the property’s value and reduce future maintenance costs
• Gifts made to your children and grandchildren while you are still alive, through which you can get vicarious pleasure by seeing them enjoy the benefits.

All this highlights the importance of planning

With careful planning, you should be able to enjoy a comfortable life in retirement and leave a legacy for your family.

Getting expert advice when you are putting together your retirement income strategy can help you maximise your wealth and give you the reassurance and peace of mind you need, knowing you are spending the right amount in retirement.

If you are a business owner or professional who would like to talk to us about your own plans, email us at clients@iqf.ie or call 071 915 5560.

Please note

This article is for information only. It does not constitute advice.

It describes financial planning services that iQ Financial can offer to you. Financial planning services are not regulated by the Central Bank of Ireland.

iQ Financial is not a tax adviser, and tax advisory services are not regulated by the Central Bank of Ireland.

The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.