Linda Cooley of Florida has seen her nest egg grow
dramatically since she retired more than five years ago as a lawyer.
Cooley, 69, lives off pensions and Social Security and has
yet to touch her retirement portfolio of several million dollars. Her financial
advisor, Susan Elser of Indianapolis, frequently reminds Cooley she could be
spending more in retirement.
“She asks, ‘Are you doing everything you want to do? Are you
buying everything you want to buy?’” Cooley says. “And the answer to that is
yes.”
Cooley isn’t alone. A recent study from the Employee Benefit
Research Institute surveyed average retirees between age 62 and 75 and found
that three-quarters of them had seen their assets remain the same or grow in
retirement.
“Very few plan to systematically spend down assets,” said a
report from asset manager BlackRock issued in conjunction with EBRI. “If assets
do decrease, there is a clear desire to keep assets above a certain, minimum
level.”
A robust stock market has also been a key factor in this
dynamic—helping retirement portfolios stay steady or even grow as many retirees
still spend what they need.
Such growth strengthens the case for increased spending in
retirement. So why the reluctance to spend? Academics and financial advisors
say the fear of running out of money is the biggest reason. Retirees don’t know
how long they are going to live, what medical expenses they’ll face, and how
their investment portfolios will perform over decades. So they protect
themselves by spending less than they could.
Mark Berg, a financial planner near Chicago, tells affluent,
relatively young retirees that now is the time to spend. “You’re in a window
which may not always be open where you have your health and you have the
means,” he tells them.
But many live modestly, no matter what he says. “I don’t
push it with people who are happily frugal,” Berg says.
A fear of needing long-term care can also discourage
retirees from spending down their nest egg. A yearslong stay in a nursing home,
for instance, can cost hundreds of thousands of dollars—the average lifetime
cost, according to PwC, is $172,000.
Jonathan Harrison, a financial advisor in the Kansas City
area, says he has a client in her early 80s who wanted to give much of her
wealth to family members but worried she wouldn’t have enough money if she
ended up in long-term care. So he set aside $150,000 of her money for long-term
care and put it in safe investments. Knowing there was a dedicated pool of
money to pay for care allowed her to make bigger gifts to family members.
“This gives her peace of mind,” he says.
Retirees are heavily influenced by the experience of family
members. “We have clients where the parents died at a young age, and they think
very differently than people whose parents died in their 90s and needed care,”
says David Frisch, a financial advisor in Melville, N.Y.
Other factors affect spending rates. Research has found that
retirees who get most of their income from pensions and annuities spend more
freely in retirement than those who rely on income from an investment
portfolio.
J.P. Morgan looked at both types of clients and equalized
their retirement wealth by creating net present values for Social Security,
pensions, and annuities. It found that among clients with $1 million to $3
million in net worth, those that received 60% to 80% of their income in regular
payments spent 26% more in retirement than did those who got only 20% to 40% of
their income from regular payments. Those with $3 million to $5 million with
more regular income spent 47% more.
“They spend
significantly more than households that are staring at account balances,” says
Katherine Roy, chief retirement strategist for J.P. Morgan Asset Management.
One fix would be to create more pension-like income for
retirees living off portfolios, Roy said. Asset managers could do it by sending
retirees something that resembled a regular paycheck, she adds.
Or course, retirees can create more stable income on their
own by spending down their assets to delay taking Social Security. The
government pension is an inflation-adjusted annuity where the payout rises by
8% for every year you wait beyond full retirement age to claim it.
The problem is that many retirees don’t like the idea of
spending down their assets to get higher Social Security payments, Roy says.
Moreover, spending habits built up during a life of saving
can be tough to overcome in retirement. “The skill-set required to create a
nest egg is the exact opposite of the one you need to spend it,” says David
Blanchett, head of retirement research at the PGIM unit of Prudential Financial
, who co-wrote a paper on underspending in retirement with Michael Finke, a
professor of wealth management at the American College of Financial Services.
Dr. Michael Dick, 73, saved at least 15% of his salary
during 40-plus years as a dentist in Rutland, Vt. He said he now has an eight-figure
investment portfolio.
His portfolio has grown since he retired five years ago. Dr.
Dick said he got satisfaction out of seeing his portfolio grow when he worked,
and that hasn’t changed in retirement. He has no use for ostentatious displays
of wealth, he says.
“I wouldn’t go out and spend $100,000 on an automobile when
I could buy a very nice one for $30,000,” he says.
Dr. Dick says he currently spends around $200,000 a year
plus he donates at least an additional $50,000 a year to charity.
“He can afford to spend more,” says Dr. Dick’s financial
advisor, Neal Van Zutphen of Tempe, Ariz., “He doesn’t need to spend more. He
has a great life.”
Dr. Dick is planning to leave substantial legacies to his
children and to charity when he dies. But advisors say that leaving money to
heirs is usually a secondary motivation for restrained spending in retirement.
“We don’t have any clients that come to us and say, ‘I want
to spend everything and not leave anything to our children,’” says Van Zutphen.
“All of them want to make sure they don’t run out of money before they run out
of life. And none of them want to be a burden to their children.”
A big predictor of how someone will spend in retirement is
how they spend while they’re working. Elser, the Indianapolis advisor, says
clients that tend to save money while working tend to keep saving money after
they retire. And clients that tended to overspend while working keep doing so
as retirees.
“You really cannot change the core values people have,” she
says. “We can help people to change at the margins.”
Deb Stecklein, one of Elser’s clients, worked as a school
dietitian, never had more than a five-figure salary, but still built up a
portfolio of more than $1 million. She and her husband, George Lennox, who has
similar net worth, travel a lot but are otherwise careful in their spending.
“I was a single parent for most of my life and raised two
children, and that’s an important nest egg,” says the 75-year-old Stecklein,
who lives in Naples, Fla. “I still want to be prepared for the rainy day.”
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