Overcoming Fear of Spending in Retirement
Journalist Jeffrey Steele of the Chicago Tribune Retirement Newsletter examines many retirees' fear of spending their savings in retirement. Graveyards are filled with people who never got around to spending their hard-earned retirement funds, so anxious are they of going through their nest eggs. According to the Center For Retirement Research writer Kim Blanton, "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."
* Why is this problem so pervasive among devoted savers?
* What are the financial unknowns that may spur this tendency?
* What strategies can reluctant spenders pursue to overcome this psychological barrier?
David Edwards replies, “We confront this issue all the time as our clients transition from careers to leisure.”
The reason why these clients obtained significant retirement assets in the first place was a lifetime commitment to saving 10, 15 even 20% of income. To spend now seems “immoral.” We often have a conversation with clients along the lines of, “if you don’t get more creative with your spending over the next 25 years, your $5 million will grow to $20 million. Dying with $20 million is not a win!”
Clients correctly fear “longevity risk” - the chance of outliving their assets. If these clients don’t have a reasonable understanding of sustainable draw rates, thy may grossly underspend in retirement and not enjoy the rewards of decades of saving and investing. As wealth advisors, we can show our clients that a properly allocated portfolio can distribute 4% of assets conservatively, 5% aggressively, and never run out of money. There is nothing magical about this approach; good advisors have provided this service to clients for 50 years.
There’s nothing wrong with leaving a large estate, and indeed, that is one of the objectives of many of our clients. Accumulating capital has never been harder than today, and our boomer aged clients want to give their gen-x children and millennial grandchildren a leg up.
Occasionally we have a client who wants to leave no estate, but eliminate all investment risk from their retirement income plan. For those clients, we can simply purchase a lifetime income annuity, which invests primarily in US Treasury bills, notes and bonds. We’re not currently recommending that strategy until treasury rates are 1.5-2.0% higher than present rates, which are at generational lows.
If you would like advice on how you can make the most of your retirement assets, schedule a call with me today!
Best regards,
David Edwards, President
347 580-5288
www.HeronWealth.com