America’s headed toward a “retirement crisis.” The majority of workers aren’t saving enough. Health care is going to cannibalize most of retirees’ assets. There’s tons of research and news coverage telling us as much, and so it must be true.
And it may very well be. Only time will tell.
In the meantime, something puzzling is going on. According to April 2018 research from Employee Benefit Research Institute (EBRI), many current retirees have barely tapped into their retirement savings.
The latest white paper from Pentegra, Approaching the Decumulation Phase of Retirement, aimed to dive deeper into this phenomenon.
“We wanted to look at the key factors and trends that drive how people are spending down their savings, what the implications are and offer recommendations,” Rich Rausser, senior vice president at Pentegra, said in a statement.
EBRI’s findings suggest both emotional and intellectual influences are at play when it comes to decumulating.
“Common reasons for underspending include a more fiscally conservative attitude taken by most aging people; uncertainty as to how long one will live (and thus how much money will be needed to see them through); an intent to bequeath assets to heirs; and … ’irrational concerns’ about health care costs,” the white paper noted.
Complicating matters, employees tend to receive far less guidance about spending in retirement than they do saving for it.
Per EBRI President and CEO Lori Lucas, whom Pentegra interviewed for the report, retiree study respondents exhibited “a lack of education. They don’t know what a safe rate for spending down is, which in some cases is further exacerbated by the difficulty they have in changing their behavior” from an accumulation to decumulation mindset.
401k advisors, plan sponsors and financial educators can do more to help Americans overcome these hurdles. If participants put forth the effort to save enough during their working years, spending during their post-work years shouldn’t be such a challenge.
Pentegra reiterates the following:
- Recommend that participants devise a decumulation strategy. Realistically determining what one expects to comfortably spend on a monthly basis—including mortgages, children’s college loans, car payments and other outstanding debts—is just a start. Incorporate expenditures above and beyond those, as well—for instance, relocating, taking trips and so on.
- Advise participants to consider potential health/medical expenses. While it’s impossible to guarantee how much one will spend in this arena, examining not only one’s own health but also family histories of illnesses/diseases, potential health effects of one’s environment—and remembering the general trend toward longer life expectancies—can help calculate an informed estimate.
- Reiterate the importance of consulting a qualified financial advisor who specializes in retirement planning. To form the best decumulation strategy, participants should enlist professional help and explore a breadth of options, including lifetime income products that may enhance one’s peace of mind (like annuities and structured distribution programs).
Jessa Claeys is a writer, editor and graphic designer.
