Despite all the talk of a retirement crisis and fears of people running through their savings too quickly, a new study finds that retirees who have spent nearly two decades in retirement have not only been able to maintain their pre-retirement standard of living after calling it a career but have managed to do so while keeping their nest egg largely intact. Unfortunately, the study also warns that future retirees may find it much more difficult to achieve anything close to the same feat.
The finding that the current generation of retirees seem to be doing fine overall comes from research conducted by the BlackRock Retirement Institute in conjunction with the Employee Benefit Research Institute that examined the finances of thousands of retiree households. The researchers divided the retirees into three groups—those with the lowest level of wealth (zero to $199,999), medium wealth ($200,000 to $499,999) and high wealth ($500,000 or more)—and then tracked the income, spending and retirement assets of each group over the first 18 years of retirement.
The researchers found that while the median income of each group dropped after leaving the workforce, retirees were nonetheless able to maintain roughly the same level of spending they enjoyed during the years leading up to retirement with income from Social Security, pensions and investments, although investments contributed far less to the income of retirees in the lowest wealth group, many of whom had relatively little or even nothing saved.
Spending did drop off somewhat as the retirees aged, but that’s hardly unexpected, as earlier research by Morningstar’s David Blanchett found that retirees tend to spend less on travel, dining out and other discretionary expenses as they get older.
Perhaps most surprising, though, the BlackRock report shows that the majority of retirees were able to maintain their spending without putting much of a strain on their nest egg. That’s due in large part to generally strong investment performance over the past 20 or so years. For example, about half of the low-wealth retirees and roughly two-thirds of those in the medium and high wealth groups still had 50% or more of their savings left after 18 years in retirement. And more than a third of the retirees in each group actually had a bigger nest egg than when they retired. In other words, even after living nearly two decades in retirement, they had yet to spend down their savings at all.
“Clearly there are exceptions and some retirees, especially those with low incomes, may be struggling,” says Nick Nefouse, the head of BlackRock’s defined contribution investment strategy team. “But we found that most people have been able to replace their pre-retirement income effectively without dipping heavily into assets.”
Future retirees, however, are almost certainly going to have to draw much more on their savings if they hope to maintain something close to their pre-retirement standard of living. One reason is that two major sources of retirement income—Social Security and a traditional defined-benefit company pension—aren’t likely to provide the same level of spending cash for the next generation of retirees as they do for the current one.
For example, the report notes that while “on average 42% of the retirees tracked in the research received income from a defined-benefit pension, few, if any, of those retiring over the next 10 to 20 years can expect income from a DB plan.” And even though Social Security isn’t going to disappear, its benefits could be reduced unless something is done to shore up its finances. Indeed, if the program’s main trust fund runs dry in 2035, as the 2017 Social Security Trustees Report projects, payroll taxes from workers would be able to fund only 75% of current benefits.
Which means to the extent that Social Security and pension income aren’t able to replace as much pre-retirement income as in the past, future retirees are going to have to rely that much more on their nest egg to pick up the slack.
And that may be a problem. Several financial services firms are predicting that over the next decade or so investors may be looking at annualized returns of 4% to 6% in stocks and 3% or so in bonds, a sharp drop from the historical average of roughly 10% annually for stocks and 5% for bonds. Not only will less generous returns make it more difficult for today’s workers to accumulate as large a nest egg as current retirees, it will also limit how much income future retirees can reasonably draw from their nest egg without too high a risk of outliving their savings.
Given that double-whammy of less income from traditional sources plus the prospect of lower investment returns, it’s hardly a shock that the Boston College Center For Retirement Research’s National Retirement Index estimates that just over half of working-age households are at risk of seeing their standard of living drop in retirement.
So what, if any, practical takeaways, can you draw from this report? Well if you’re retired, I think the results speak to how important it is to periodically monitor both your spending and the value of your nest egg throughout your post-career life.
The obvious reason for doing that is to avoid exhausting your savings while you’ve still got a lot of living to do. But as this report shows, far from running dry too quickly, your nest egg’s value could decline only slightly or even continue to grow. That may be fine if you’re conserving assets because you want to leave a legacy or you see a savings cushion as a reasonable way to hedge against risks like living well beyond your life expectancy or the possibility of facing onerous health care costs late in life.
But some retirees are reluctant to draw on their savings because they just can’t seem to make the transition spending after years of being conditioned to save. They suffer from what I call “Spendaphobia,” or an almost preternatural inability to spend. If this sort of behavioral quirk is preventing you from tapping more freely into your assets and enjoying the fruits of years of disciplined saving, then you may want to consider loosening the purse strings a bit to engage in the “social spending” that research shows can lead to a happier retirement.
If you’re still working, the lesson is you’re going to have to adjust your planning to reflect the likelihood that traditional income sources like Social Security and pensions could provide less income than in the past and that the financial markets may generate far less generous returns.
So if you want a realistic shot at secure retirement, at the very least you’re likely going to have to step up your saving effort. Depending on how successful you are at doing that—and how much income you figure you’ll need to fund an acceptable retirement lifestyle—you may also want to stay on the job a few more years to give your nest egg more time to grow and delay taking Social Security to qualify for a higher monthly payment.
Of course, you can’t dictate the investment returns you’ll earn. But by investing your savings in a broadly diversified portfolio of low-cost index funds and ETFs, you can at least reap a larger share of whatever gains the financial markets deliver, which in turn should improve your chances of achieving a secure retirement.