The Case for (Carefully) Spending More in Retirement
Saving for decades? You might be better off than you think
It may have not felt like it, but saving was the easy part of retirement planning. Just two decisions to make: how much to save and how to invest. Once you reach retirement, things get trickier as you rely on what’s saved to pay the bills. Figuring out a sustainable withdrawal strategy can feel like trying to play three-dimensional chess.
What will your investment returns be? How long will you live? Will you incur major expenses later in life for healthcare? Should you claim Social Security before age 70, when you are eligible for the largest benefit? Hint, if you’re in good health at age 62, deciding to delay until age 70 is the smartest retirement income strategy.
Given all that uncertainty, it makes sense to err on the side of a conservative withdrawal approach. But for households that have done a solid job of saving, there may be a case for loosening your retirement purse strings a bit, if that might bring you happiness.
Yes, happiness. If ever there was a life stage where happiness is not just a goal, but an earned benefit, it should be retirement. If being able to spend a bit more today — on you, sharing with your family, sharing with your community or causes you care deeply about — would make you happier, that seems a strategy worth exploring.
Indeed, research suggests that households with a chunk of retirement savings may in fact be in a position to spend a bit more.
A fresh analysis from the nonpartisan Employee Benefits Research Institute (EBRI) reported that three out of four people in 2017 who were at least 71 years old limited their Traditional IRA withdrawal for that year to the required minimum distribution (RMD). Among retirees with at least $250,000 invested in an IRA, fewer than 20% withdrew more than the RMD. That hints at the possibility that many people are taking the RMD as a recommendation for what to withdraw, when it is in fact merely the minimum you must withdraw to satisfy the IRS. (Note: In 2017, RMDs were required once you reached age 70 ½. The RMD age has since been raised to age 72.)
Last year, asset management firm BlackRock issued a report in conjunction with EBRI that found that for people who started retirement with $200,000 to $500,000 in retirement accounts (housing equity is excluded), more than one-third had more money in those accounts 17 years into retirement. The median household that started with that pot of money, had used up less than 25% of it 17 to 18 years into retirement.
For households that started retirement with retirement savings of at least $500,000, the median value of their accounts 17 to 18 years into retirement was more than 80% of the starting value.
A few years ago, research from Texas Tech University based on government data estimated that households with above average retirement savings were significantly underspending, even when the researchers set aside a big chunk of money at the start of retirement as a reserve for potential care needs later in life.
Again, to be very, very clear, this is not a suggestion to start spending at will in retirement. Rather, just to raise the possibility that with careful consideration you may in fact be able to spend more today.
Of course, there are plenty of vexing unknowns to worry about. As the BlackRock report noted, retirees from nearly 20 years ago were more likely to have an old-fashioned pension that provides guaranteed income. There’s also the issue of when/if/how Congress will eventually close Social Security’s cash flow gap, a move that could reduce retiree benefits. And at least for the next 10 years or so, market returns may be lower than their historical norm, based on today’s record low bond rates and elevated stock values.
Moreover, today’s retirees will, on average, live longer than retirees from 20 years ago. To that end, this is a life stage where working with a certified financial planner can be your best investment. There are now plenty of CFPs you can hire on an hourly or project basis, if you’re not interested in an ongoing relationship.
One strategy to consider is to cover all your essential living costs from guaranteed sources of income. Social Security is guaranteed income, as is a pension payout. If that covers all your essential living costs, then you can likely entertain a higher withdrawal rate from investment accounts. If those guaranteed income sources don’t cover the essentials, you might discuss using some of your retirement savings to purchase a plain-vanilla income annuity; it works just like a pension payout. With that in place, you’re now able to spend more of your remaining retirement investments.
Determined to leave an inheritance? OK, if you have all your essential costs covered by guaranteed income sources, you theoretically could invest more of your retirement accounts in stocks: When bear markets hit, you don’t need to worry about covering your expenses.
That said, the key to any strategy is to stay flexible. Research has shown that the first 10 years of retirement is the key to the long-term success of your strategy. Whatever strategy you start with can, and should, be tweaked whenever things are not going well, and just as important, when things are going very well.