Retirees with assets that annuitize income spend twice as much as retirees with an equal amount of non-annuitized savings. That’s an eye-catching new finding David Blanchett and Michael Finke released this week in a new analysis by the Alliance for Lifetime Income’s Retirement Income Institute (RII).
“Essentially, annuities with lifetime income protection give retirees a psychological license to spend their savings in retirement.”
David Blanchett
In their newly released study, Guaranteed Income: A License to Spend, RII Fellows Blanchett and Finke examine how Americans are far more likely to achieve their lifestyle goals in retirement through annuitized income, overcoming the uncertainty of life expectancy and the reluctance to spend down savings.
“Essentially, annuities with lifetime income protection give retirees a psychological license to spend their savings in retirement,” said Blanchett, Head of Retirement Research at PGIM DC Solutions. “Retirees clearly prefer to live off income, but many don’t feel comfortable depleting down assets to fund a lifestyle. This is an unfortunate paradox since funding a lifestyle is what motivates people to save for retirement, and few retirees indicate a desire to pass on significant wealth at death.”
Using data from the Health and Retirement Study (HRS), Blanchett and Finke examine households with at least $100,000 in savings and compare how much money they could be spending in retirement to how much they are actually spending based on existing guaranteed income sources and assuming financial assets are annuitized. They pair these findings with those of a proprietary survey of 2,051 adults nationwide regarding behavioral tendencies that may influence their spending in retirement.
Their analysis centers on the challenge Americans face when determining how much they’re able to spend from their investments each year in retirement—an inherently difficult task given that both the length of retirement and returns on assets are unknown. A retiree can either spend generously and risk outliving their savings or spend conservatively and miss out on the lifestyle they envisioned. A retiree who is concerned about outliving their savings will spend less.
Blanchett and Finke find that every $1 of assets converted to guaranteed income could result in roughly twice the equivalent spending compared to money left invested in a portfolio. This effect suggests that the explanation for under-spending of non-annuitized savings among retirees is likely both a behavioral and a rational response to longevity risk.
“Increasing the share of wealth allocated to annuitized income can not only reduce the risk of an unknown lifespan, it can also allow retirees to spend their savings without the discomfort generated by seeing one’s nest egg gradually get smaller,” said Finke, Professor and Frank M. Engle Chair of Economic Security Research at the American College of Financial Services.
The survey of 2,051 Americans included in Blanchett’s and Finke’s analysis finds that 60% of respondents would feel more comfortable spending on nonessential activities such as going on vacation or eating dinner with friends in retirement if they received an additional $10,000 of income for life than if they had an additional $140,000 of retirement savings (40.6%). The wealth amount represented the average cost of $10,000 of annuitized income at retirement. The increased willingness to spend from income was just as high among retirees who had saved $500,000 or more.
Spending retirement savings a common cause of anxiety
Blanchett’s and Finke’s analysis corresponds with findings in the Alliance’s 2024 Protected Retirement Income and Planning (PRIP) Study, a new survey of 2,516 consumers in the U.S. ages 45 to 75 regarding their attitudes and behaviors toward retirement savings.
Nearly half of retirees (46%) acknowledge that spending their savings gives them anxiety. The level of discomfort is tied to asset levels: 55% of those with less than $100,000 in assets are anxious about their spending in comparison to 48% of those with assets between $100,000 and $500,000. Nearly a third of retirees (32%) indicate they are spending money faster than they anticipated.
Compounding the anxiety of many Americans is the lack of confidence in the long-term solvency of Social Security. Only 58% of respondents are confident Social Security will provide income for the rest of their life.
Read the full study here: Guaranteed Income: A License to Spend
SEE ALSO:
• Annuities in Retirement Plans: Tamiko Toland’s Insights on Guaranteed Income Solutions
• Americans Want $1.2M to Retire Comfortably
• 401(k) Participant Interest in Annuities Surges, LIMRA Says
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
