A budget is the best way to avoid running out of money in retirement

Too many online shopping sprees. Frequent dinners at your favorite steak house. Pricey vacation getaways. And, of course, high inflation. Houston, we have a problem: Many retirees are spending way more than they expected.

Those bigger bills are busting their budgets and draining their nest eggs quicker than planned. In fact, nearly half (49 percent) of retirees said their overall spending is higher than they expected when they first retired, up from 36 percent in 2022, according to the 2023 Retirement Confidence Survey conducted by the Employee Benefit Research Institute. Nearly four of 10 retirees said they’re spending more than they planned on health care. Thirty-three percent cited housing, and 29 percent are shelling out more than expected on travel and entertainment, the EBRI survey found.

Why the out-of-control spending? Stephanie Roberts, a partner, VP, and wealth manager at Haase Family Advisors at Steward Partners, ticks off three common causes of overspending: “Emotional spending,  or using spending to fill a void. Lifestyle creep. No plan.”

Big risks from overspending

Retirees who overspend risk making their retirement less secure.  That’s especially true if their life expectancy extends farther into the future than they anticipate and if they don’t have a well-funded emergency fund. “If you spend recklessly in retirement, you punch a hole in your retirement savings bucket that you can never fill,” says Steve Parrish, adjunct professor and codirector of the Center for Retirement Income at The American College of Financial Services. “You can’t work your way out of it, and you probably can’t invest your way out of it, either.”

The fallout from overspending could mean outliving your nest egg, having to cut back on your retirement dreams, not being able to pay for emergencies like a sudden medical bill and racking up credit card debt you can’t afford. It could also cause you to have to go back to work to make ends meet.

There’s also a potential psychological fallout to frittering away your nest egg too quickly, says Robert Peterson, senior wealth advisor at Crescent Grove Advisors. “Having adequate savings provides a feeling of security,” says Peterson. “If you are constantly running up credit card debt and barely making debt payments, you are adding a huge amount of stress to your life and diminishing your long-term health as well.”

Often, overspending before retirement foreshadows an inability for retirees to stick to a budget once they stop working. “In my experience, it is very hard to get off the hedonistic treadmill, so the event of retiring is not likely to change a person’s behavior,” says Peterson.

It’s not just retirees with modest nest eggs who can be upended by overspending. It’s not unusual for high-income earners to suddenly get a rude awakening when they shift to a fixed income in retirement and can’t cover spending with their next paycheck. “High earners can find it challenging, as it demands adapting to a more mindful expense approach that may differ from their accustomed lifestyle,” says Yosef Ghebray, a certified financial planner for digital investment firm Betterment.

Michael Berkhahn, a vice president  at Graham Capital Wealth, says overspending should be one of the top concerns of retirees, especially in the first few years after they stop working. The risk of burning through too much cash in the early years of retirement, he says, is that retirees might not comprehend how much damage it might cause years down the road.  “Retirees let the euphoria of recently retiring cause them to overspend,” says Berkhahn. “People dream of retiring for 30-plus years. And once they hit retirement, they are in the honeymoon phase. They dreamed of all the places they wanted to visit or things they couldn’t do while they were working. It’s important in this phase that new retirees have a real understanding of their finances and not let the enthusiasm of retirement cause them to overspend.”

How to stay on course

How do you rein in spending habits that are setting you up for financial failure later in retirement? Here are five ways to fix spending problems.

1. Identify the problem. Sure, coming up short each month when you go to pay the bills is a yellow flag. But you can’t fix the overspending problem until you know what’s causing it, says Catherine Irby Arnold, senior VP and market leader at U.S. Bank Private Wealth Management.

“How can you rein in your spending if you have no idea where it’s going?” says Arnold. There are plenty of budget-tracking apps, she says, that can help you isolate the main culprits without having to scrutinize your credit card bill when it arrives. “The apps help you identify repeat offenses,” says Arnold. “If you’re spending thousands of dollars a month on dinners out, that’s a real wake-up call.”

Once you know exactly where your money is disappearing to, it’s time to sit down and have an honest conversation with your spouse, partner or family to address the issue and come up with ways to fix it, such as coming up with a workable budget.

2. Peer into the crystal ball. Nothing gets retirees’ attention better than showing them exactly how uncontrolled spending will put their finances in a perilous state if they don’t change their ways. “You have to project how long this pot of money is going to last,” says Arnold. “And for some people it’s a big wake-up call (when they learn) that it’s not going to be there as long as they think it’s going to be.”

For example, a 67-year-old retiree who thinks her nest egg will last till 100 is likely to understand the severity of the spending problem once she finds out her money might not last past 80.

3. Create a budget. The days of going out to eat whenever you want or shopping online because you’re bored are over. It’s time for financial discipline. And that means creating a budget that forces you to spend within your means. The goal is to have less money going out each month than comes in.

A good way to get a complete picture of your spending is to analyze your spending in the previous year. “This will provide you with a perspective of where you spent your money and can show you spending trends and habits,” says Berkhahn. Having a better understanding of your discretionary and nondiscretionary spending habits will allow you to prioritize what’s important.”

Analyzing your expenses will also help you see areas where you’re wasting funds. One spending bucket is for so-called life essentials, such as rent, food, bills and transportation. The other bucket is things that you don’t necessarily have to spend on, such as eating out, traveling and picking up the bar tab after a night out. “There should be an accurate tracking of spending and staying within budget limits,” says Thomas Salvino, CEO at Performance Wealth Partners.

4. Wean yourself off spending. Cutting spending is no different than dieting or kicking off a new workout plan. Going gung ho at the beginning, such as cutting off all discretionary spending, is akin to running a marathon on your first day of training or fasting for a full week when you start a diet. In short, it won’t work, says Peterson. “Making drastic changes will make it less likely to stick to your new spending habits,” he says.

Make small changes instead. If you regularly eat out three days a week, skip eating out one night a week. Avoid the daily Starbucks run for a day or two. Change one of your shopping habits, such as not logging into Amazon when you’re bored. “No one change is going to save the day, but small changes along the way can help change your behavior, which is the real goal,” says Peterson.

To kick the spending habit, you also must separate things you want from things you need, says Peterson. “What you want to do is take a pause before spending to determine if you really need an item,” he says.

Delaying gratification is another way to minimize the temptation to make impulse purchases. “If you step back and decide to wait a week or more on the purchase, it is likely you will decide not to make the purchase,” says Peterson. And even if you end up buying the product, at least you gave it plenty of thought.

A simple way to spend less when you go shopping is to make a list. “And stick to it,” says Ghebray. “A few minutes of preplanning will help you avoid purchasing unnecessary items.” Another tip to keep you from taking the credit card out of your wallet is to practice mindfulness. “Remind yourself of your financial goals and the consequences of overspending,” says Ghebray.

Another technique to spend less is to use a debit card instead of a credit card, says Roberts. This way you make sure you can afford the purchase now and are not piling up debt and going the pay-it-later route.

5. Stop doing what you’ve been doing. Just as an overweight person can’t keep eating high-calorie foods if he expects to lose weight, people who overspend can’t keep managing their money the same way. You must change your behavior to get your finances in order. “You can’t say, ‘I’m just going to keep doing what I’ve been doing,” says Arnold. So, if you’ve never had a budget, make one. “It’s never too late,” he says.