Retirees can be too frugal with their spending

The fear of running out of money in retirement is widespread -- and understandable. But it may also be pushing retirees to hoard their hard-earned savings more than is warranted. And that means they may be shortchanging themselves when it comes to funding their living expenses in retirement. 

These are among the many findings in a recent report issued by the Employee Benefit Research Institute (EBRI).

EBRI analyzed the assets and spending statistics for retirees in the first 20 years of their retirement, using data from the respected Health and Retirement Study (HRS) and Consumption and Activities Mail Survey (CAMS). They found that in general, retirees are spending down their assets quite slowly. For example:

  • For retirees with less than $200,000 in non-housing assets immediately before retirement, the median had spent down about one-quarter of their assets after 18 years.
  • For those with between $200,000 and $500,000, the median had spent down a little more than one-quarter of their assets over 18 years.
  • For those with at least $500,000, the median had spent down just 11.8 percent within the first 20 years of retirement.
  • About one-third of all sampled retirees had increased their assets over the first 18 years of retirement.

EBRI also found that retirees with pension income were much less likely to have spent down their assets than non-pensioners. During the first 18 years of retirement, the median non-housing assets of pensioners had dropped by just 4 percent, compared to 34 percent for non-pensioners. One possible explanation is that pensioners had started with higher retirement savings than non-pensioners.  

Also, the majority of retirees avoided drawing down their assets by limiting spending to their flow of regular income from sources such as Social Security, pensions and annuities. This is another possible explanation for why pensioners are drawing down assets at a slower rate than non-pensioners

In additions, the EBRI report discussed the possible reasons retirees are hesitant to spend down their savings:

  • They're uncertain about how long their money might need to last, so they're cautious with it in case they live a long time.
  • Retirees might be worried that they'll incur high expenses for medical care or long-term care at the end of their lives.
  • They might want to preserve assets for bequests.
  • Retirees might not be aware of strategies that allow higher spending yet still preserve a level of assets, so they err on the side of caution.
  • Many retirees might find it difficult to shift their mindset from accumulating savings to spending them down.

Indeed, these are all valid reasons for retirees to be cautious with their spending. EBRI's findings that retirees appear to be frugal with their spending are consistent with an earlier report prepared by the advisory firm United Income.

The EBRI report is also careful to point out that some retirees are running out of money in retirement. For example, of those who started with less than $200,000 in savings, about one-third have less than 20 percent of their assets remaining after 17 to 18 years of retirement.  

What are some possible lessons new retirees and older workers who are approaching their retirement years can take from EBRI's study results? Here are a few:

  • Working longer to delay starting Social Security and drawing down assets is an excellent way to increase retirement income, particularly for workers with less than $200,000 in savings.
  • Retirees might want to consider working part time for "mad money" that they can spend on travel and other discretionary expenses, which allows them to preserve their primary financial assets.
  • Older workers and retirees can devise strategies to spend down their assets in a manner such that they won't run out of money in retirement. These strategies can include buying a low-cost annuity or using the IRS's required minimum distribution to calculate their annual withdrawals.
  • People with substantial home equity might want to explore the possible uses of their home equity to improve their retirement security.
  • Retirees can protect themselves from high medical costs by supplementing Medicare with a Medigap policy or Medicare Advantage plan.
  • Retirees should adopt a strategy to protect against high costs for long-term care.

Older workers and retirees who adopt one or more of these strategies might feel comfortable spending more in retirement to enjoy their lives. Financing a 20- to 30-year retirement isn't easy, so it only makes sense to spend some time researching and adopting smart strategies.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.