Why Save If You’re Not Going To Spend? Ep #182

Mar 8, 2021

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How long have you been saving for retirement? Are you hesitant to break into your retirement funds and start living it up once you retire?

This week I share two Retirement Headlines articles. The first is called Right-Sizing Retirement and it comes from the Financial Planning Association. In this article, the authors pose an important question: why save for retirement if you're not going to spend it?

We’ll also check out another article from Wharton Magazine entitled The Economics of Living to 100. Is your retirement plan ready for you to live until 100? Listen to this episode to understand how you can best combat the uncertainty that retirement brings.

Outline of This Episode

[1:42] Right-sizing retirement
[6:28] Combat uncertainty with contingency planning
[7:22] What if you live until 100?
[11:50] There is a need for longevity income
[13:39] What is your plan B?

Why are Americans underspending in their first 10 years of retirement?

David Blanchett and Warren Cormier recently wrote an article for the Financial Planning Association in which they explore the first 10 years of retirement. What they discovered from the RAND Health and Retirement Study is that early retirees tend to underspend. The authors wanted to find the underlying reasons for why we are seeing this trend in America. This research explores the retirement consumption gap and considers both the wealth available to fund retirement and spending before and after retirement.

There are 2 types of retirees

Retirees can be broken down into 2 main categories: those who have saved enough to cover their levels of pre-retirement spending and those who did not. Interestingly, both of these types of retirees tend to underspend in early retirement but for different reasons.

Only 18 percent of households in America have enough wealth to cover their pre-retirement spending during retirement. This tells us that most households will not be able to maintain their pre-retirement lifestyle in retirement because they don’t have enough money.

You may think that only those that don’t have enough saved cut their spending in retirement, however, the data shows that most households that have saved more than enough to fund their lifestyles in retirement also decrease their spending in early retirement.

Why don't well-funded households spend more in retirement?

Many well-funded households could increase consumption but don’t. So, why does this group of retirees spend less during early retirement? Potential reasons include the desire to leave a legacy, uncertain medical expenses, or an uncertain life expectancy. There also could be psychological or other reasons not easily discerned from survey data.

Uncertainty leads to spending less

The main reason for this lack of spending in the first 10 years of retirement is uncertainty. Does the uncertainty that retirement brings give you pause to live out your retirement fully?

One way to combat this unpredictability is with contingency planning. If you’re listening to a retirement podcast then you probably have a retirement plan, but do you have a plan B? What will you do if life throws a wrench in your plans? Listen in to hear what you can do to combat the uncertainty that retirement brings.