Striking a Balance on Spending in Retirement

A study published in 2021 in the Journal of Financial Planning found that just 18 percent of newly retired Americans had enough wealth to keep spending at preretirement levels. But almost everyone, at every wealth level, spent less. In most cases, this was a good move, a matter of right-sizing spending to fit available resources, co-authors David Blanchett and Warren Cormier reported. They found that 10 years into retirement, 48 percent of households had the resources to support their spending.

“We see too many households err on the side of not spending when they’re younger in retirement” for fear of running out of money when they are older, says Blanchett, who is managing director and head of retirement research for PGIM DC Solutions, the global investment management business of Prudential Financial.

Another study, also published in the Journal of Financial Planning in 2021, found that average retirees in the top three-fifths of income spent less than they took in from Social Security, pensions, investment earnings, and other income sources. The researchers, led by Asebedo’s Texas Tech colleague Christopher Browning, then looked at how that consumption gap might affect overall assets over a 30-year retirement under various investment scenarios.

Their conclusion? Even if a generous 40 percent of the portfolio was set aside for late-in-life medical expenses and bequests, a retiree with a mid-level income might underspend by as much as 8percent. The wealthiest retirees might use 47 percent less than they could safely spend.

Understanding the Underspending Mindset

Advisors see plenty of people who haven’t saved and invested nearly enough to keep up their spending in retirement. These folks may have enjoyed six-figure incomes, nice homes, pricey vacations, and other trappings of a comfortable lifestyle, but they never saved more than the bare minimum in a 401(k) plan. Many are unpleasantly surprised to learn that they must live more modestly in retirement.

The under spender who has $3 million in retirement accounts, for example, and is used to living well within their means, may end up growing their assets in retirement if they keep their pre-retirement spending habits. All of a sudden $3 million is $12 million when they pass away.

Nudging people to spend more isn’t a simple matter of showing them an eye-popping projection. That’s because good savers often have personality traits that make them uneasy spenders, Asebedo says. In one study, she and Browning found some of the lowest portfolio withdrawal rates among people who showed the highest levels of conscientiousness.

“These are the quintessential savers, the budgeters, the ones who have all the checklists,” she says. Spending more may literally make such people queasy, Asebedo says. “We expect people to just flip a switch once they get to retirement. We say, ‘OK, it’s time to take money out, it’s time to spend.’ And I think we underestimate what kind of a psychological leap that can be for a lot of people because of the years and years of blood, sweat, and tears and self-control it took to put that money in. It actually can feel painful and nauseating for some people to pull money out.”

In fact, according to a September 2020 Employee Benefit Research Institute survey of 2,000 Americans ages 62 to 75, only 14.1 percent think they’ll spend down all their assets. Moreover, nearly 60 percent plan to grow their assets in retirement, leave them untouched, or spend them down only a little.

Whatever your mindset or comfort with spending, consult one of our advisors to help you establish a comfortable and enjoyable retirement.

Source: Broadridge Investor Communication Solutions, Inc.