Many households retire without enough money to maintain their pre-retirement standard of living. Once retired, though, people often reduce their spending enough to make their money last, according to a recent study by US-based financial services provider Morningstar.
“People are finding a way to make it work,” said David Blanchett, head of retirement research at Morningstar.
The findings challenge a common financial planning assumption that retirees' spending will increase at the rate of inflation each year. But the research also indicates many people retire without a realistic understanding of how much they can safely spend.
Running out vs. running short
The fear of running out of money is pervasive. Nearly half as many people globally have this concern, and their worries may be well-founded. A 2012 research paper found 46.1 per cent of older adults died with less than $10,000 (Dh36,730) in financial assets.
Few people relish the idea of having to cut back sharply on their spending in retirement.
Spending less slows the burn rate
A more recent research, published in September 2020, revealed that households have had at least $10,000 (Dh36,730) in savings at retirement. Analysis found only 18 per cent retired with enough money to maintain their standard of living.
Over time, though, most of the households reduced their spending and slowed how quickly they were burning through their savings. After 10 years, the proportion with sufficient funds to last their retirement shot up to 48 per cent.
The afore-mentioned research has its limitations. The sample size was relatively small, didn't include the poorest households and examined only the first 10 years of retirement. Also, the researchers couldn't tell whether people were cutting back by necessity or choice. Blanchett believes many haven't thought enough about how much retirement will cost and are forced to adjust as their savings dwindle.
“Either they didn't know how much they needed to save, or they just didn't (save),” Blanchett says. “They get to retirement and they have to start making harder choices.”
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 did not. In fact, 29 per cent of the best-funded households actually had more wealth 10 years into retirement.
That resonates with financial planners, who say they often have clients who spend less - sometimes much less - than their wealth would support. Some want to leave inheritances for their kids or guard against financial shocks, such as long-term care. In other cases, they're just more comfortable continuing old habits.
“If you are in the habit of being frugal, you tend to remain that way,” says US-based certified financial planner Dana Anspach.
People can take frugality too far, though, if fear keeps them from getting the most out of their retirements, Blanchett adds.
“You might end up not spending enough money when you could enjoy it more”.
A little planning can go a long way
Picking the ‘right’ level of spending in retirement isn't easy because of all the unknowns, including how long you will live and your future health. Having a clear idea of what your expenses are likely to be in retirement, 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 advisor committed to putting your best interests first - could be helpful. Your brokerage also may have resources to help guide you.
A little planning could go a long way to help the many people who won't be able to sustain their pre-retirement lifestyle. Blanchett likens it to being able to spot the edge of a cliff in time to avoid going over.
“It can be a very painful reality for a lot of people when they really understand what they have and what they need,” Blanchett says. “But I'd rather you understand that at 65 than you get to the point that you've blown through all your savings.”
