In Retirement: What You Can Spend vs. What You Will Spend
Most people spend all of their working lives saving and investing so they have a nice nest egg to withdraw from once their working days end. I’ll put together a synopsis on what you can safely withdraw in retirement in a future Up Early, but not until I finish the new book by Bill Bengen who originated the “4% rule” 20 years ago.
For now, let’s look at some interesting research on how much retirees feel comfortable withdrawing from their investments during retirement (i.e. what you will likely spend). The findings might surprise you.
In December 2024, David Blanchett and Michael S. Finke published a paper entitled “Retirees Spend Lifetime Income, Not Savings”. Their findings are that retirees spend less than what was originally predicted, and likely, less than their parents. That makes sense for two reasons:
- Earlier generations of workers had what are called defined benefit plans. Those are your good old-fashioned traditional pensions which are nearly extinct except for government employees at the federal and state levels. Under the traditional pension, the retiree knew exactly how much their monthly income would be and could spend 100% of it comfortably knowing that next month the same check would arrive again. Today’s workers rely on defined contribution plans, primarily consisting of 403(b)s, 401(k)s and IRAs. Under these current plans, there is no monthly check in retirement, and the retiree has to decide how much to withdraw from their accumulated retirement savings.
- There are many unknowns that retirees must grapple with these days, including their lifespan, future Social Security earnings and stock market volatility. Those unknowns, combined with the lack of a set amount in a monthly check from a traditional pension all lead to the same result: retirees spend less than they could in retirement because of both fear of running out of money and lack of knowledge on safe withdrawal rates.
Blanchett and Finke’s article summarized the statistics supporting that finding as follows:
- Retirees spend only around 50% of their savings over their lifetime.
- Married 65-year-olds with at least $100,000 in assets typically withdraw just 2.1% per year from qualified and non-qualified investment accounts.
- Over a 30-year period, retirees in the top 20% of net worth (currently approximately $560,000) could spend over $1 million more than they do and not come close to running out of money.
These findings are no surprise to me from my experience as a financial planner and also as a personal investor. It is very hard psychologically to shift from saving and investing to what’s called the “the decumulation phase” when you need to start liquidating investments and begin systematic withdrawals. For most people, this is why professional help is a must in retirement.
A good financial planner can give you confidence in many ways, including in your ability to safely withdraw more than you probably would otherwise take from your investments. That doesn’t mean that you must increase spending on “things”, but perhaps for example, it would allow you to make lifetime gifts to watch the enjoyment it brings to family members and yourself rather than waiting until your demise. Alternatively, getting a warm appreciative letter from a charity for a donation is a great feel-good moment. Perhaps a family trip to a special place is really within your budget!
Fun Fact: Did you ever wonder at what age people are the happiest? German and Swiss researchers studied over 460,000 people around the world and found age 70 to be the happiest age. I’ve seen other studies that differed from that finding. One had age 23 and a study at Harvard found 35 to be the happiest age. For me, I will keep abiding by the words of Jonathan Swift: “No wise man ever wished to be younger.” – Experience is the best teacher!
