Half of Retirees Afraid to Use Savings
For most retirees, figuring out how much money to withdraw from savings every year is a difficult-to-impossible math problem. But the issue goes much deeper: fears about what the future might bring make this decision overwhelming.
Extreme caution is a popular solution. A 2009 study estimated that by the time middle-income retirees are in their 80s, they still had not touched about three-fourths of their savings, and 2016 research found that retirees with substantial assets are the most reluctant spenders. Vanguard recently reported that retirees with very modest savings turn around and reinvest a third of the money they’re required to withdraw under IRS rules after age 70½.
People saved all of their lives to make sure they will enjoy retirement. So why are they so reluctant to spend the money for the purpose it was intended?
A 2018 study in the Journal of Personal Finance surveyed retirees to get a sense of the psychology behind their caution. However, the main takeaway is that this reluctance to spend is pervasive.
Half of the survey respondents agreed with this statement: “The thought of my retirement portfolio balance going down over time brings me discomfort, even if the decline in value is a result of me spending money on my retirement goals.”
And the people who agreed with this statement said they feel like they are not well prepared financially to retire – and this had nothing to do with how prepared they actually are.
Many of the study’s findings seem like common sense. For example, when older people look into the future, an enormous unknown is how much they will need for medical care – this includes the prospect of requiring care in an expensive long-term care facility. These concerns are heightened by large and rising medical expenses, which are taking a bigger and bigger bite out of retirees’ budgets.
In the survey, the people who are the most concerned about their medical costs are also more likely to be uncomfortable about spending their savings, regardless of how old they are.
Another group are people who are nervous about the inevitable ups and downs of the stock market.
I recently had dinner with a friend who is one of these reluctant spenders. On the theory that knowledge is power, I gave her this retirement calculator to help her get a handle on her financial outlook.
But the calculator can only estimate the probability that she will not outlast her money. There are no guarantees.
Retirees who want to enjoy their hard-earned savings have to learn to live with some uncertainty so they don’t shortchange themselves.
Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here. This blog is supported by the Center for Retirement Research at Boston College.