Why Many Retirees Spend Only Half of What They Saved
Each year they took out about 2% to live on, and each year the balance stayed close to where it started.
Picture a couple named Wendell, 74, and Edith, 72. They retired with savings built over decades. Each year they took out about 2% to live on, and each year the balance stayed close to where it started.
Edith noticed it on the anniversary of their move abroad. "We are not spending it," she said. "We are watching it."
"I like watching it," Wendell said.
They went to find out whether other couples did the same.
| What the research reported | Source |
|---|---|
| Retirees spent about 80% of their guaranteed lifetime income, and only about half of their available savings | Blanchett and Finke, about 2,500 US households, as reported by the trade publication Financial Planning |
| Married 65-year-olds took out an average of 2.1% of savings a year | Same study |
| Retirees with a pension saw median non-housing assets fall about 4% over 18 years, against about 34% for those without one | Employee Benefit Research Institute, April 2018, using Health and Retirement Study data |
| About one third of retirees increased their assets | Same report |
| Households with US$500,000 or more spent down about 11.8% over 20 years | Same report |
Boston College's Center for Retirement Research looked at the path of wealth in retirement. It found that median household wealth falls more slowly than the years of life remaining. Its model that fits the data most closely includes a wish to leave money, for higher-income retirees, along with uncertainty about how long life will be and what medical costs may come.
Wendell read that twice. "So we are not odd."
"We are about the 2.1%," Edith said.
The research does not call this a mistake. Some of the money held back may be a care reserve, and almost 7 in 10 people turning 65 will need some long-term care, for about 3 years on average, according to the Administration for Community Living. Some may be meant for the children.
Edith did a piece of arithmetic on the back of an envelope. This is an example only. If a couple with US$500,000 spent half of it over 25 years, that would be US$250,000 divided by 25, or US$10,000 a year. That is 2% of the starting balance, with no growth counted.
"Ten thousand a year would not buy the trip we keep talking about," she said.
"No," Wendell said. "It would not."
They did not decide anything that night. They did write two lists. One was what the money was for. The other was what they wanted to have done by the time they were eighty.
You could…
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Work out what percent of your savings you take out each year, and compare it with 2.1%.
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Set aside a care reserve you can name, as in the surplus article, and see what is left.
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Pick one thing from the second list and put a date on it.
What was the thing you held back on, and what did you learn? Share it here. Someone reading may be watching a balance too.
Figures are estimates for planning, based on public data. The US$500,000 example is invented. Sources: Blanchett and Finke, as reported in Financial Planning; Employee Benefit Research Institute Issue Brief, April 2018; Boston College Center for Retirement Research, "The Trajectory of Wealth in Retirement"; Administration for Community Living.
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