Many households in the US retire without having enough money to maintain their pre-retirement standard of living. Once retired, however, people often reduce their spending enough to eventually make money, according to a recent study by David Blanchett, head of retirement research at Morningstar,
and Warren Cormier, executive director of the Identifying Contribution Institutional Investments Association’s Retirement Research Center.
“People are looking for ways to make it work,” Blanchett said.
These findings challenge a conventional financial planning assumption that retiree spending will increase with annual inflation rates. But research has also shown that many people retire without a realistic understanding of how much they can safely spend.
Running out compared to running short
Fear of running out of money is rampant in America Nearly half of Americans have this concern, according to the 2019 Aegon Retirement Readiness Survey. And their worries may be justified. A 2012 article by the National Bureau of Economic Research found that 46.1% of the elderly died with financial assets less than $ 10,000.
Of course, the phrase “run out of money” is somewhat misleading. The majority of retirees in the United States receive it Social Security Benefits, continue for life. So even though they may spend all their savings and run out of money, they cannot really run out.
However, very few people are interested in the idea of having to drastically cut their spending in retirement or create an existence at $ 1,543 a month (check Current Average Social Security).
Spending less slows the burning speed
Blanchett and Cormier studied 425 US households with at least $ 10,000 in retirement savings and $ 5,000 in annual Social Security benefits. They find that only 18% have retired with enough money to maintain their standard of living.
However, over time, most households have reduced spending and reduced the rate at which their savings are burned. After 10 years, the percentage with enough money to retire eventually rose to 48%.
The study, published in September 2020, has its limitations. The sample size is relatively small, excludes the poorest households and checks only the first 10 years of retirement. Additionally, researchers cannot know whether people are cutting back by necessity or by choice. Blanchett believes that many people are not thinking enough about it How much will retirement cost and is forced to adjust as their savings run out.
“Or they don’t how much they need to save, or they didn’t (save), ”Blanchett said. “They’re going to retire and they have to start making more difficult choices.”
Some people may spend more than they don’t
However, researchers also found that many households with enough money still spend as much as they do not. In fact, 29% of the best funded households actually have more assets after 10 years of retirement.
That resonates with financial planners, who say they typically have customers who spend less – sometimes much less – than their wealth will support. Some want to leave an inheritance to their children or watch out for financial shocks, such as long-term care. In other cases, they feel more comfortable continuing their old habits.
“If you have a savings habit, you tend to stay like that,” says certified financial planner Dana Anspach in Scottsdale, Arizona.
However, people can see saving as too far off, if fear keeps them from making the most of their retirement, Blanchett said.
“You probably won’t spend enough money when you can enjoy it more,” he said.
Small planning can go a long way
Choosing the “right” level of spending when you retire is not easy because there are many unknowns, including how long you live and your future health. Having a clear idea of what your retirement expenses will likely be, as well as how much income you can expect, can help you create a sustainable spending plan. A good financial planner – preferably a fee-only trust advisor committed to putting your best interests first – can be helpful. Your broker or 401 (k) provider may also have resources to help guide you.
Making a small plan can be of great help to those who were unable to maintain their pre-retirement lifestyle. Blanchett likens it to be able to promptly detect the edge of a cliff to avoid overtaking.
“It can be a very painful reality for a lot of people when they really understand what they have and what they need,” Blanchett said. “But I’d rather you understand that at age 65 than you reach the point where you’ve spent all your savings.”
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Liz Weston writes for NerdWallet. Email: [email protected] Twitter: @lizweston.