One of the quirks about planning for—and living in—retirement is that people spend years preparing for it by saving money. Yet when they actually retire, some people are afraid to spend the money they worked hard to save.

Indeed, the decumulation phase of a person’s financial life can be a funny thing. One financial services executive who follows the retirement space said that’s partly because the financial services industry has invested a lot of intellectual capital to help people keep on track with saving for retirement, while perhaps neglecting the matter of how people spend their nest egg during retirement. 

“There have been a lot of guardrails put in place over the past 50 years or so for savers, but there’s not nearly so much guidance for spenders,” said Avi Sharon, executive vice president and product strategist at Pimco. “The likelihood of people’s misbehavior only rises in the decumulation phase, yet there’s a lack of guidance or guardrails for it.”

Sharon and a Pimco colleague spoke during a presentation Wednesday on investor behaviors in retirement during the “Next Chapter—ReThinking Retirement” virtual conference hosted by Financial Advisor.

Pimco is an asset manager best known for its fixed-income expertise, but Sharon noted that more than half of the company’s $2 trillion-plus in assets under management is dedicated to retirement accounts, particularly on its institutional platform for defined benefit and defined contribution plans.

He said retirement is one of Pimco’s top three strategic initiatives, and that focus led to a new study it did called “The Well-Tempered Retiree: Fine-Tuning Investor Behaviors in Retirement.” He and his colleague discussed the survey’s results during their conference presentation.

“We think the greatest opportunity for advisors—and the most interesting question for researchers—centers on that odd word of ‘decumulation,’” Sharon said. “Decumulation is about how to most effectively convert a traditional savings-oriented portfolio into what’s essentially a cash-flow machine. The transition from saving to spending obliges one to reconceive a portfolio not as a means to drive the greatest wealth, but rather to provide predictable income each year over the full retirement journey. Essentially, it’s paycheck replacement.”

He posited that the decumulation phase is fraught with potential pitfalls. “One thing we say with high confidence is getting investor behavior [right] in the decumulation phase is the sine qua non of success.”

In comparing accumulation to decumulation, Sharon said the financial services industry has borrowed from behavioral finance research to develop effective nudges to help keep folks on track with their retirement saving. Many of those come straight from individuals’ paychecks in the form of employer-sponsored retirement plans, default investment options and auto-enrollment, along with accelerated contribution options for older savers.

“That’s not to say saving is an easy matter,” he said, before he rattled off the various hazards on the decumulation side. They include mistiming when a person retires, setting an inappropriate spending level, mistiming the Social Security claiming strategy, and sequence risks dealing with the timing of withdrawals from a retirement account. There are also risks that retirees will get panicky during market downturns, sell assets and lock in losses, which can knock a retirement plan off course.

“Our goal was to establish a research program and explore the nature of investor characteristics that impact decision-making during decumulation,” Sharon said.

The resulting survey involved roughly 750 wealthy investors who either are approaching retirement or are already there. It covered four main areas, one of which gauged people’s confidence level about their retirement. Eighty-three percent of survey respondents said they were confident or highly confident they’d meet their future needs. Another 88% said they were above-average investors, and most said they expect to live past age 90.

“Confidence is what we want. It’s desirable as long as it’s justified,” said Jennifer Gongola, Pimco’s behavioral science research manager. “But overconfidence is the behemoth bias. It creeps into our lives in many different ways, and you can see it here.”

She noted that 55% of wealthy investors who participated in the Pimco survey had an unrealistic plan for withdrawing money from their savings. That included 19% of respondents who said they didn’t have any plan to support their spending. Gongola said these people have a misalignment between their confidence level and reality, particularly since the majority of survey participants believe that longevity is on their side.

Another finding from the survey was that one in three respondents were susceptible to a loss-aversion bias, which means they’re more focused on avoiding loss than achieving gain. Gongola described loss aversion as an emotional reaction to risk that can impact retirement-related decision-making in various ways. For example, it can make spending from a nest egg feel like a loss, even when that spending is aimed at a retirement goal. And Pimco says loss-averse investors struggle to weather temporary market disruptions.

She added that some people are more loss averse than others. “Those who had a regular source of cash flow during this transition period [to retirement] had significantly lower levels of loss aversion. And at any stage of retirement, having a consistent cash flow makes an investor much more confident.”

Elsewhere, the survey examined how investors prioritize risk. Health and market risks topped the charts among both soon-to-be retirees and those already in retirement. But 60% of Pimco’s respondents said they’d be willing or very willing to cut back their retirement spending budget to accommodate the vagaries of the markets.

The survey’s final focus area was legacy planning. It found that those who didn’t prioritize a legacy goal for their retirement portfolio planned to spend down 67% of their total wealth. On the flip side, those who consider legacy planning an essential priority intend to spend down just 35% of their total liquid wealth.

The Pimco duo concluded that managing people through their retirement years isn’t just a numbers game. Rather, it requires input from the field of behavioral science.

“Things like the 4% spending rule can’t solve for the complexities of decumulation,” Sharon said.