The biggest problem that many of today’s retirees have may be spending their life savings—or even spending at all.
A recent study conducted by the BlackRock Retirement Institute and the Employee Benefit Retirement Institute found that most retirees have 80 percent of their pre-retirement savings nearly two decades after they quit work.
The survey was based on a sample of 7,148 households in terms of assets and a sub-sample of 1,660 retirees households on the expenditure side. It was segmented into three groups: the lowest wealth group with zero to $200,000 in pre-retirement, non-housing assets; the middle group with $200,000 to $500,000; and those with $500,000 or more. So these folks were not retired CEOs and investment bankers.
The findings challenge conventional wisdom among advisors and widely respected academic theories about lifecycle consumption developed by Nobel Laureate Franco Modigliani. In fact, more than one-third of the retirees in all three wealth groups grew their assets in retirement.
What explains this behavior? One thing is clear—many retirees either didn’t need to or didn’t want to spend their savings. But it’s not clear how much of their thriftiness can be attributed to parsimonious behavior and what is explained by other factors.
Anne Ackerley, managing director and head of BlackRock’s defined contribution business, has a few ideas, including the possibility that many of these retirees may be afraid of outliving their money.
Ackerley suspects this is a major factor; she added that less than 18 percent are actually overspending and that awareness of longevity risk is on the rise.
This is a serious question. Anecdotal evidence from financial advisors reveals that they tend to have two kinds of retired clients: a small group who overspend and a much larger group who live well within their means. Among this group, most were natural-born savers accustomed for years to seeing their life savings appreciate. When the monthly paychecks stop coming in, it influences their spending.
Second, since the majority are folks who saved all their lives, many may not “know how to spend” once they enter the de-cumulation phase of their lives, she said. That's one of the reasons why BlackRock is developing tools, sort of target date funds in reverse, to help retirees manage spending in a way that doesn’t cost them sleep.
One of the smartest advisors I know, a specialist in financial life planning, told me when he retired at 75, “it’s scary.” And I would guess by any standards outside of Wall Street or Silicon Valley, this advisor is not only an authority, but very well-off.