Generation early retirement: Transitioning from saver to spender.

One of the least appreciated challenges in the passage from work to retirement is adjusting your mindset from saver to spender. 

One consequence of spending reluctance is that the standard of living for many retirees is below what they can otherwise afford, resulting in a “retirement consumption gap” ranging from 8 percent to over 50 percent. The consequence is that about one-third of retirees increased their assets over the first 18 years in retirement.¹

What accounts for this spending hesitation?

The primary reason retirees underspend may be a conscious choice. For instance, one survey found that only 43 percent of retirees planned to spend all their retirement savings, while a majority indicated a desire to either spend only a portion of their total savings or grow their assets.²

When retirees were asked why they didn’t want to spend down more of their assets, the reasons were varied:

• 38 percent were worried about unforeseen future expenses,
• 37 percent felt that spending down retirement assets was unnecessary,
• 33 percent wanted to leave as much as possible to heirs,
• 31 percent simply felt more comfortable with having sufficient savings, and
• 27 percent feared running out of money.³

"the guarantee of predictable, steady income for a lifetime creates greater confidence in spending, reduces financial and emotional stress, and promotes overall higher levels of happiness and security in retirement."

Many reasons, one conclusion

While the motives given for their restrained spending are many, they reflect a common concern—retirees don’t want “overspending” to derail their objectives, whether that objective is not to run out of money or to make a charitable bequest.

That may be why retirees with lifetime income, e.g., a defined benefit pension plan, had higher spending satisfaction and financial confidence in retirement.⁴

In other words, the guarantee of predictable, steady income for a lifetime creates greater confidence in spending, reduces financial and emotional stress, and promotes overall higher levels of happiness and security in retirement.

Switching to a Spending Mindset

There are several ways retirees can become more comfortable with spending, without compromising their financial goals or security.

1. Have a Strategy: A retirement income strategy can give retirees greater confidence that spending today doesn’t need to endanger their financial health tomorrow.
2. Create “Funding Buckets”: Set aside future expenses, like a child’s wedding or grandchildren’s college funding, into separate accounts. This removes the worry that any spending may impact meeting these future goals.
3. Construct a Stream of Guaranteed Lifetime Income: Since many Americans do not have a pension plan and Social Security meets only a fraction of their income needs, retirees can consider purchasing an annuity to provide “pension-like” income for their lifetimes. According to one survey, 45 percent of retirees with an annuity feel more comfortable that their savings will last a lifetime versus just 18 percent of those without an annuity.⁵
4. Work with a Financial Professional: By working with a financial professional, retirees can experience greater confidence in their retirement years.

For instance, seven in 10 baby boomers with a financial advisor reported feeling “excited and confident” or “happy and cautiously optimistic” about retirement versus just one-third of boomers without a financial advisor.⁶

Learn more about how New York Life can help you achieve a more secure and rewarding retirement or find a New York Life financial professional near you.
 

1. David Blanchett, Michael Finke, “Guaranteed Income: A License to Spend,” June 28, 2021
2. Lori Lucas, CFA, Employee Benefit Research Institute, “Why Do People Spend the Way They Do in Retirement? Findings from EBRI’s Spending in Retirement Survey, January 14, 2021
3. Lori Lucas, CFA, Employee Benefit Research Institute, “Why Do People Spend the Way They Do in Retirement? Findings from EBRI’s Spending in Retirement Survey, January 14, 2021.
4. Lori Lucas, CFA, Employee Benefit Research Institute, “Why Do People Spend the Way They Do in Retirement? Findings from EBRI’s Spending in Retirement Survey, January 14, 2021.
5. Insured Retirement Institute, Boomer Expectations for Retirement, 2019, April 2019.
6. Insured Retirement Institute, Boomer Expectations for Retirement, 2019, April 2019.

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