Spending in Retirement – What Does the Data Show Us?
I have a confession to make: I sometimes forget that not everyone is as keen to deep dive into finance as I am. Recently, I spent a chunk of my weekend reviewing the data on retirement spending. I was excited to share some of my findings with my wife Jodi, but watched her eyes slowly glaze over as she politely listened to me.
Since my wife didn’t prove as enthusiastic about research findings as I had hoped, I figured I would share some observations here.
What sparked my curiosity was the Employee Benefit Research Institute (EBRI) research I read. They conducted a study in 2018 about how American retirees spend their accumulated savings in the two decades after retirement. The findings showed that retirees tend to exhibit very slow decumulation of assets.
Here are some of their findings:
• In the first 18 years of retirement, individuals with less than $200,000 of assets (excluding their house) spent down about 25% of their assets
• Individuals with between $200,000 and $500,000 in non-house assets just before retirement spent about 27.2% of their funds
• Those going into retirement with at least $500,000 of non-house assets spent about 11.8% of their money in the first 20 years of retirement
• Pensioners were less likely to have spent down their assets than non-pensioners, spending only 4% of their savings compared to 34% for non-pensioners
• The median household in the study only spent the gains from their investments and barely touched the principal.
It’s important to note these are median numbers, so the study would have included households on either extreme: those that spent significant amounts of money and those that spent very little.
The average household on the other hand, across all asset levels, spent down only a fraction of their savings. Further, roughly one-third of retirees in this study had more money two decades later than when they started retirement.
Of course this seems odd at first. Generally, we’re taught that the financial cycle has phases: we spend the bulk of our working lives saving and accumulating wealth so we can spend it in retirement. The data provided by the study shows that the spending part of that equation may not be happening to the extent we expected.
EBRI suggests that behavioural biases (i.e. switching from saving to spending) and education (if one has no financial plan, they might not know what they can spend) are potential reasons for lower retirement spending.
I have a few views on the matter.
Firstly, I think behavioural bias is very real. You work for decades, spending less than you earn, diligently saving, developing routines and habits – so, in many ways, you become accustomed to that lifestyle, all of which is very hard to change. It is difficult to suddenly switch and become a spender. In my opinion, that’s not necessarily a bad thing, if you’re comfortable with your lifestyle and you’re happy, there’s no need to change it. In addition, spending down assets is not always an objective.
Often, we work with a number of retirees whose goal is to not spend the entirety of their wealth. They want there to be money in an estate, a legacy, maybe even for charity, or to pass along to their grandkids. Managing spending in retirement is part of the plan so that there can be a healthy estate.
A common question we get is: “Do I have enough to retire?”
I believe the fear underlying this question is that you might outlive your money. Of course, a proper financial plan can help answer that question and ease that fear. However, if you don’t have a plan, the fear of outliving your money might push you to be more conservative with your retirement spending.
This is where the data could be a concern if someone is going without and unnecessarily cutting back. Financial planning can remedy that situation and help someone determine a sustainable level of spending.
Of course, all of these views are anecdotal, but they do seem to fit the data mentioned. I think the biggest takeaway from the study is the importance of a financial plan.
Your financial goals likely differ from your neighbours, co-workers, and the people in this study. Maybe you only want to spend a portion of your wealth and intentionally leave a large amount to your estate. Perhaps you want to spend every penny. Both are acceptable approaches. It all depends on what you want.
Studies like this help to understand the trends in retirement, but that doesn’t mean your retirement has to follow the trend. Now is the time to discuss with a qualified financial professional, to ensure you have a plan that meets your needs.
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The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.
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