When you've been working your entire career to save for retirement, the last thing you want is to blow through your savings too quickly during your golden years. And yet, that's a reality for many retirees.
The average American retiree is expected to outlive his or her savings by eight to 10 years, according to a study from the World Economic Forum. That means for the last decade or so of your life, you could be left to depend on your Social Security benefits to make ends meet if your retirement fund runs dry.
To avoid this scenario, it's important to make sure you've built a strong enough nest egg that will last the rest of your life. But even more critically, once you're in retirement, you need to make sure you're spending your savings at a good pace so you don't run out of money too soon. And new research shows that some personality types are better at this skill than others.
How personality affects your retirement savings
A new study from the American Psychological Association looked at how retirees' personalities affect how much they withdraw from their retirement funds. Researchers discovered that those who are more extroverted, positive, conscientious (i.e., organized and thorough), and who have higher financial self-efficacy tend to withdraw less from their savings each year.
On the other side of the coin, those who are more negative or neurotic (i.e., they often worry or feel stressed) tend to withdraw more from their savings per year. In addition, people with more open and agreeable personalities (meaning they are adventurous, creative, sympathetic, and helpful) were also found to withdraw their savings at a faster rate.
In general, those who withdraw less from their savings each year will see their money last longer throughout retirement. However, it's important to note that spending less isn't always a good thing. If you have a robust retirement fund but you're only withdrawing the bare minimum each year because you're afraid of overspending, you could be missing out on a more enjoyable retirement lifestyle by spending less than you can afford.
In other words, withdrawing from your retirement fund is a balancing act. You don't want to spend your money too quickly and risk running out of cash too soon, but you also don't want to deny yourself the retirement experiences you crave because you're being overly careful with your money.
Finding the right withdrawal strategy for your savings
Everyone needs some type of portfolio withdrawal strategy to make sure they're pacing themselves throughout retirement. But creating one is easier said than done.
One common guideline for how much you should withdraw each year is the 4% rule, which says you can withdraw 4% of your total savings during your first year of retirement, then adjust that amount every year after to account for inflation. So, for instance, if you have a nest egg worth $750,000, you can withdraw $30,000 in your first year of retirement.
The 4% rule has its advantages and disadvantages. It's a good benchmark to ensure you're pacing yourself because it can give you a rough idea of how much you can afford to spend each year. However, it does have flaws. For example, it assumes you're going to be spending the same amount year after year when in reality your spending might fluctuate throughout retirement. Also, the 4% rule is designed to help your savings last around 30 years, so if you expect you won't spend that much time in retirement, you might be able to withdraw more each year than what the 4% rule suggests.
Because creating a withdrawal strategy can be complex, it might be a good idea to talk to a financial advisor to develop a plan to fit your specific needs. An advisor can take a look at your savings and discuss your ideal retirement lifestyle to get a sense of how much you'll be spending each year and whether your spending levels will fluctuate over time. Your advisor can also help you develop a plan in case the market shifts and your savings take a hit. When you spend decades in retirement, you're bound to experience a recession or two -- and it can affect how much you should withdraw from your savings.
Regardless of whether you receive help from a professional or go the DIY route, you'll need some type of withdrawal strategy to keep your spending in check. Certain personality traits might make it easier or more challenging to pace yourself and ensure you're not overspending, but no matter your personality, a solid withdrawal strategy will lead to a more enjoyable retirement.