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The Real Data About Outliving Retirement Savings

We’ve all heard the doom-and-gloom news about retirement savings: you need millions socked away to last throughout your retirement; push your retirement age back to 70 to make sure you have enough money; do these things and more, or you’ll be living on public assistance before you know it. Yikes. No wonder folks these days question whether they will ever be able to retire.

These horror stories get published because they’re attention grabbers – they work because they play on our fear and insecurity about stepping into this new chapter of life.

While there’s no question that a significant number of Americans have only modest retirement savings, a new study suggests that, with prudent spending behavior, those middling nest eggs can provide for a long and secure retirement.

You don’t have to take me at my word. You can read the findings from a recent article published by researcher Sudipto Banerjee of the Employee Benefit Research Institute. Using government data from the US Health and Retirement Study, Banerjee was able to track retirees born between 1931 and 1941 with assets ranging from stocks, bonds, mutual funds, real estate and CDs to savings and checking accounts. For his inquiry, individual homes were excluded.

In a statistical review published in the EBRI Issue Brief, Banerjee found that the data show “that retirees generally exhibit very slow decumulation of assets.”

Read as: retirees aren’t spending themselves into the poor house during the first few years of retirement.

In fact, many never spend every penny they’ve saved. And, here’s the kicker, it’s not because they’ve amassed million-dollar nest eggs. The study focused on people at all savings levels: less than $200,000 saved, between $200,000 and $500,000 saved, and more than $500,000 saved.

Banerjee found that, among the $200,000 or less group, within the first 18 years of retirement, these folks had (at the median) only spent down about a quarter of their assets. During the same period, retirees with between $200,000 and $500,000 had spent down only slightly more, about 27%. As for folks with over $500,000, they had spent even less – about 11.8% during the first 20 years of retirement. Even people with only $32,000 saved shortly after leaving the workforce had almost $24,000 left two decades after retiring!

Got a pension? Even better, says the research. During the first 18 years of retirement, the data showed that the median non-housing assets of pensioners had gone down only 4%.

And there’s more still. The research indicated that, while some retirees do in fact spend down a big chunk of their assets during those first 18 years, about one-third of the sampled retirees increased their assets over that period. Wow. You don’t hear about that on the news.

What gives? Banerjee concluded that, because retirees often worry about spending down all of their savings, they adjust by living more humbly. By doing so, these people make even modest savings last for years longer than researchers and financial talking heads expect.

As Banerjee puts it, “When household income of retirees is compared to household spending, the study finds that majority of households indeed limit their spending to their income.” He continues: “Rational behavior defies the assumption in many studies that people exhaust their savings and live in crisis.”

So, people are afraid that they will run out of money, so they live more frugally. This could be a by-product of the overly dramatic drum beat of retirement fear mongers, like Suze Orman and crew. In fact, the EBRI study identified conservative spending habits among every income group.

Still, being prudent with spending is a good thing, as long as there is a balance. You don’t want to be the ultra-millionaire that is afraid to spend a dime. The flip side is that you don’t want to be tapping your nest egg for lavish purchases instead of keeping an eye on the future. You do best to strike a nice balance and practice living comfortably within your means.

From where I stand, it looks like people are reluctant to dip into their nest eggs during retirement and choose instead to live off the interest and income from their investments.

This is a smart way to think about how to fund retirement. I’m a big believer in the 4% Rule, and this is one strategy that seems to be working for some retirees. Retirement spending is, after all, a dynamic process: when the market is doing well, you can afford to spend a little more; if the economy takes a dip, well, then you know it’s time to tighten the spending belt for a while. This isn’t just theory; it’s real life. I’ve seen it happen.

Back to Banerjee, the St. Louis Post Dispatch recently did an article about his research and about one retiree who was living proof that the data are from real Americans.

In this story, a retired electrician worried he would run out of money, so he put himself on a miserly spending plan. His financial planner disagreed, assuring this retiree that his pension and savings would be plenty for a lifetime and that he should allow himself some fun. While working, the electrician rarely indulged himself and focused on providing for his family and raising six children. Heeding his planner’s advice, the retiree took three driving vacations last year with his wife and treated himself to a used Chevrolet Silverado pickup.

“It’s beautiful,” he said. “I roll down the window, stick my arm out, play retro music and turn back the clock 40 years.” Now that’s what I call a happy retirement.

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