A growing body of research suggests that retirees aren’t spending as much as they could, and it may be because of FORO: the fear of running out.
A study published this month in the academic journal Financial Planning Review found that, contrary to many financial models, inflation-adjusted spending in retirement tends to decline over time — even for retirees who have enough savings to live comfortably.
David Blanchett, the study’s author and head of retirement research at Prudential Financial, says the spending pattern is like “smiling,” spending that starts off strong and then slows down as the retiree gets older, creating a downward trend in the graph.
“While some of the reduced spending may be due to retirees needing to cut back because they are subsidized, this analysis suggests that even retirees who might increase their savings tend not to do so,” Blanchett wrote in the study.
A separate study published earlier this month by Corebridge Financial provides clues as to why retirees are not spending. Nearly half of the company’s respondents said they feel uncertain about how to use their savings, and less than 1 in 3 Americans approaching retirement have a plan to withdraw their savings in retirement.
Don’t let FORO ruin your retirement
Financial expert Jean Chatzky, owner of HerMoney and author of AARP, partnered with Corebridge Financial to create the “downsizing” planner, a guide to help people confidently spend the money they’ve spent decades accumulating.
When most people think about retirement, they probably think about saving. That’s how the topic has been shaped for decades, according to Chatzky.
“It’s a message that Gen X, the first without a pension, took to heart and subsequent generations followed,” Chatzky said in a news release. “But what stands out as these people start to retire is that without a plan of how they will actually use that money, they face retirement due to uncertainty.”
Part of that uncertainty likely has to do with health care costs, as Blanchett’s research suggests.
“Health care risks are a clear wildcard when it comes to retirement planning,” Blanchett said.
His previous research introduced the concept of the “smile” of retirement costs, which he says is a reflection of the different stages of retirement: the “go” years of early retirement filled with hobbies and travel, the “go-go” years when age naturally slows down the retiree and finally the “no-go years” when spending reverses health care costs and pays for other medical expenses.
But in his updated analysis, he notes that the typical retiree does not incur significant health care costs later in life, and that the general increase in health care costs later in life is often matched by a fall in spending in the travel and leisure categories.
“Worries about running out of money often create spending habits that limit fulfillment later in life,” says Terri Fiedler, president of retirement services at Corebridge. “Having a thoughtful retirement plan can help people manage complex financial decisions.”
For many retirees, the 4% withdrawal rule — where they withdraw 4% of their retirement savings and adjust that number each year to increase cash flow — is about as complicated as the plan gets. But even the creator of the 4% rule recently updated his recommendation to 4.7% as a “worst case scenario” and generally recommends higher withdrawal rates, between 5% and 5.5%.
At a recent conference hosted by White Coat Investors, Christine Benz, Morningstar’s director of retirement planning, shared tips for retirees who are afraid to let down their nest egg.
He recommends working with a financial planner and they give you money that you can spend safely. Some retirees may be able to trick themselves into spending money by creating “buckets” for different purposes so they feel like they’re overspending in any one area or by choosing a certain type of income, such as their Social Security check, to fully spend each month.
He also talked about the benefits of single premium immediate annuities, or SPIAs, which can be purchased with a lump sum up front and provide guaranteed income for life. A separate study found that systematically combining SPIAs with investment withdrawals can increase your retirement income by 23%.
