Many Retirees Don't Spend Down Their Savings

Here's how it's supposed work: save for retirement during your decades in the labor force, then spend down those savings in retirement. But that's not how it works for many Americans.

Retirees are loath to spend down their savings, according to a study by Sudipto Banerjee of the Employee Benefit Research Institute. Using data from the Health and Retirement Study, Banerjee examines changes in the non-housing assets of retirees during nearly two decades of retirement. He divides retirees into three groups based on the size of their pre-retirement non-housing assets, minus debt: Group A had non-housing assets below $200,000 (median of $29,975); Group B had non-housing assets between $200,000 and $500,000 (median of $333,940); Group C had non-housing assets of $500,000 or more (median of $857,450). Regardless of asset group, Banerjee finds the same phenomenon—the non-housing assets of retirees shrink far less than what is assumed by retirement models. After 17 to 20 years of retirement, Group A's non-housing assets had fallen by only 24 percent, Group B's by 27 percent, and Group C's by 12 percent.

Not only are retirees resistant to spending down their savings, a large percentage actually grow their assets in retirement. More than one-third of retirees, regardless of asset group, had larger non-housing assets after nearly two decades of retirement than they did at the time they retired.

Retirees are hesitant to spend down their savings for four reason: 1) uncertainty about future financial needs; 2) the desire to leave an inheritance; 3) not knowing the safe rate for spending down assets; and 4) behavioral habits—"After building a saving habit throughout their working lives, people find it challenging to shift into spending mode," Banerjee suggests.

Source: Employee Benefit Research Institute, Asset Decumulation or Asset Preservation? What Guides Retirement Spending?