Even if they can easily afford it, new research has found retirees are reluctant to spend their savings from 401(k)s, IRAs and other retirement account for a more enjoyable lifestyle.
“…many retirees are denying themselves the opportunity to enjoy life by spending more of their savings.”
David Blanchett
Instead, retirees spend significantly more from their sources of lifetime income—such as Social Security, pensions, and/or annuities—than they do from their savings in retirement accounts.
Those findings are part of a new research study, “Retirees Spend Lifetime Income, Not Savings,” by David Blanchett and Michael Finke, Research Fellows in the Retirement Income Institute (RII) at the Alliance for Lifetime Income. This research builds on their groundbreaking RII paper last year, “Guaranteed Income: A License to Spend,” which demonstrated that people can enjoy retirement more fully if they allowed themselves to spend money more freely. It found retirees with assets that annuitize income spend twice as much as retirees with an equal amount of non-annuitized savings.
“Unless people purposefully want to leave behind a large bequest when they die, many retirees are denying themselves the opportunity to enjoy life by spending more of their savings,” said Blanchett, Head of Retirement Research at PGIM DC Solutions.
“I don’t think people purposefully want to horde their savings; they are just finding it difficult to view savings as a potential form of retirement income,” added Finke, Professor and Frank M. Engle Chair of Economic Security Research at the American College of Financial Services. “They are able to make that adjustment when they receive annuity and RMD payments, so there is a path to getting over this behavioral barrier.”
Overall, the new analysis suggests that converting savings into lifetime income could increase retirement consumption significantly, especially for married households. “Our analysis clearly demonstrates that households spend differently across sources of wealth. Retirees spend a much higher percentage of their lifetime income (about 80%) and spend about half the amount that they could safely spend from other sources,” the study notes.
The study also found retirees spend a higher rate of their savings after the federal government requires distributions from their retirement savings accounts. Retirees seem to view the forced asset distribution—known as Required Minimum Distributions (RMDs)—as income and spend it at a higher rate than they spend from other savings. Accounts subject to RMDs include traditional IRAs, SEP IRAs, and most employer-sponsored retirement plans like 401(k)s.
“Overall, these findings have important implications for the current and future state of retirement in the United States given the rise of defined contribution (DC) plans as a more prevalent funding source for retirement,” the authors say. “DC plans are principally focused on growing assets and typically are not explicitly focused on generating income. Therefore, unless steps are proactively taken to ensure retirees effectively use savings to fund spending, this analysis suggests households are likely to continue under-consuming in retirement potentially at even greater levels.”
Blanchett and Finke point out steps can be taken to help retirees view their savings as income and therefore feel freer to spend: “Financial institutions that are aware of the tendency to bracket investment decisions differently than lifetime income can focus on reframing wealth as income or automatically liquidate investments to create the appearance of income. For example, managed payout funds designed to distribute a percentage of wealth each year can help retirees frame savings as income.”
Estimating investment withdrawals not easy
Part of the reason retirees are reluctant to spend more freely is the complexity of navigating a retirement system designed with a focus on saving and investing (accumulation) rather than spending (decumulation of assets).
“Estimating how much income can be withdrawn from investments in retirement is far more complex than receiving a monthly pension payment,” the study notes. Complicating factors for retirees trying to determine how much to spend every year include a “limited financial knowledge, an unknown lifespan” and “an array of available financial resources to consider, including Social Security, pension, wages, and investment assets inside and outside of retirement accounts.”
To better understand how people 65 and older are spending money, Blanchett and Finke analyzed data from the Health and Retirement Study, which is an ongoing nationally representative survey of approximately 20,000 Americans over 50 and supported by the Social Security Administration and National Institute on Aging.
In the new RII study, two broad categories of available financial resources or assets were considered: income and savings:
- Income was separated into three groups: lifetime income (Social Security, pensions, and annuity income), earnings (wages and salaries for those who have not fully retired), and capital income (which includes income from businesses, rental property, dividends and interest, and trust funds or royalties).
- Savings were broken into qualified (defined contribution balances, IRAs, etc.) and non-qualified monies held in taxable accounts.
“Our analysis found much higher spending rates from lifetime income sources than from wages or capital income,” the study noted. “Roughly 80% of lifetime income is spent, while less than half of wage income and capital income are spent. In addition, 65-year-old couples were found to be spending just 2% of their savings, which is roughly half of the commonly cited ‘4% rule’ and even lower than most recent estimates, suggesting 5% is a more reasonable starting place.”
Use that ‘license to spend’
In the aforementioned June 2024 study, Guaranteed Income: A License to Spend, Blanchett and Finke determined that retirees with assets that annuitize income spend twice as much as retirees with an equal amount of non-annuitized savings.
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.
Their analysis corresponds with findings in the Alliance for Lifetime Income’s 2024 Protected Retirement Income and Planning (PRIP) Study, in which 46% of the 2,516 consumers aged 45 to 75 surveyed acknowledged that spending their savings gives them anxiety.
SEE ALSO:
• How Annuitizing Income Gives Retirees a ‘License to Spend’ (Twice as Much!)
• Lack of ‘Annuity Fluency’ Hindering 401(k) Participant Interest
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.