Many US households retire without enough money to maintain their standard of living before retirement. However, according to a recent study by David Blanchett, director of retirement research at Morningstar, people cut their expenses often enough to last for the money.
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and Warren Cormier, executive director of the Retirement Research Center for the Defined Contribution Institutional Investment Association.
“People find a way to make it work,” says Blanchett.
The results challenge a common assumption in financial planning that retirees’ spending will increase with inflation each year. But research also shows that many people retire without a realistic understanding of how much they can safely spend.
Run out vs. become scarce
The fear of running out of money is widespread in the United States. Almost half of Americans have this concern, according to the Aegon Retirement Readiness Survey 2019. And their concerns may be well founded. A 2012 paper published for the National Bureau of Economic Research found that 46.1% of older adults with financial assets less than $ 10,000 died.
Of course, the phrase “no more money” is a bit misleading. The vast majority of US retirees receive it Social security benefitsthat go on for life. While they may be running out of savings and run out of money, they can’t really run out.
Still, few people enjoy the idea of drastically cutting their retirement expenses or building a livelihood on $ 1,543 a month (the current average social security check).
Less spending slows the burn rate
Blanchett and Cormier studied 425 US households who had at least $ 10,000 in savings and $ 5,000 in annual social security benefits when retired. They found that only 18% were retired with enough money to maintain their standard of living.
However, over time, most households reduced their spending and slowed how quickly they used up their savings. After 10 years, the proportion with sufficient funds for retirement rose to 48%.
The study published in September 2020 has its limits. The sample size was relatively small, did not include the poorest households, and only looked at the first 10 years of retirement. Also, the researchers couldn’t tell if people are cutting back because of need or choice. Blanchett believes many haven’t thought about it enough how much retirement costs and are forced to adjust when their savings run low.
“Either they didn’t know how much they had to saveor they just didn’t (saved) it, ”says Blanchett. “You are retiring and you have to start making more difficult decisions.”
Some who could spend more don’t
However, the researchers also found that many of the households that had enough money were spending as if they weren’t. In fact, 29% of the best-funded households had more wealth 10 years after they retired.
This goes down well with financial planners, who say they often have clients who spend less – sometimes much less – than their wealth would support. Some want to bequeath inheritances for their children or protect themselves from financial shocks like long-term care. In other cases, they just feel more comfortable keeping old habits.
“When you are in the habit of being frugal, you usually stick around that way,” says Dana Anspach, a certified financial planner of Scottsdale, Arizona.
However, people can go too far when fear prevents them from getting the most out of their retirement, Blanchett says.
“You might not end up spending enough money if you could enjoy it more,” he says.
A little planning can go a long way
Choosing the “right” amount of retirement spending is not easy because of all the unknowns, including length of your life and future health. When you have a clear idea of what your retirement spending will be and how much income you can expect, then you can come up with a sustainable spending plan. A good financial planner – preferably an escrow advisor who is only committed to putting your interests first – could be helpful. Your broker or 401 (k) provider may also have resources to help guide you.
A little planning could go a long way in helping the many people who cannot sustain their lifestyle before retirement. Blanchett compares it to being able to spot the edge of a cliff in time to avoid being run over.
“It can be a very painful reality for a lot of people when they really understand what they have and what they need,” says Blanchett. “But I’d rather you understand this at 65 than you get to the point where you’ve used up all of your savings.”
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Liz Weston writes for NerdWallet. Email: [email protected]. Twitter: @lizweston.