Retirees worry they will live too long to enjoy their money.
Studies show those who spend more report greater satisfaction in retirement, yet older Americans often live below their means. The prospect of a life of 95 or 100 years turns many into penny-pinchers, reluctant to spend their hard-earned savings now with so many years of bills remaining.
Researchers call it the retirement consumption puzzle.
Married 65-year-olds with at least $100,000 in financial assets withdrew an average of 2.1% of their savings annually, according to a forthcoming study that analyzed data from a long-running survey of approximately 20,000 people over age 50.
That is well below the 4% spending rate many advisers recommend, which would have protected retirees from running out of money in every 30 years since 1926, said co-author David Blanchett, head of retirement research at PGIM DC Solutions, an affiliate of Prudential Financial. The goal is to ensure nest eggs last 30 years in the worst of times, which means they last even longer in better markets.
Spending below one’s means is especially prevalent among wealthier retirees. Those in the top 20% of the wealth distribution could safely spend an estimated $773,000 to $1.165 million more over a 30-year retirement, depending on how their money is invested, while still setting aside 40% of their initial wealth for emergencies or bequests, said Michael Finke, a professor at the American College of Financial Services.
Fear is making them miss out. While it is crucial to plan for longevity, it is also important to find pleasure in retirement, when “many people have the time and money and wisdom to enjoy their lives in a way they never could before,” said Meir Statman, a finance professor at Santa Clara University in California who has studied later-in-life financial and personal well-being.
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