Speaking at the 2018 PLANSPONSOR National Conference in Washington, D.C., Lori Lucas, president and CEO, Employee Benefit Research Institute (EBRI), noted that it is extremely difficult to teach people to save enough for retirement. “That’s the reason we have lots of nudges such as automatic plan features.”
But it is also not easy to teach people how to spend down the assets they accumulate once they retire. “Retirement is not a long vacation; people are lost, confused, unsure, unclear, perplexed, disoriented and bewildered,” she said.
She added that the typical calculator for spending down assets is discouraging; it shows that, if one spends down in a straight line, he will run out of money at a certain age, but assumes that after that age, he will need no more money. “This is not true. For one thing, people do not decumulate assets in retirement in a nice, neat pattern.”
It is important to understand how people spend assets in retirement to know how to help them. According to Lucas, a Society of Actuaries (SOA) focus group study showed that people want to maintain or increase asset levels in retirement. Retirees are reducing their standard of living because they don’t want to spend. The question, she said, is whether this is creating a problem or if retirees are all right with this.
An EBRI 2018 Issue Brief, based on data from the Health and Retirement Study (HRS), shows that, from the first two years up to 18 years in retirement, retirees in the low-asset group ($220,000 in investable assets or less) spend on average only 24.4% of assets. Those going into retirement with $200,000 to $500,000 are spending 27.2%, and the highest-asset group (those with greater than $500,000 in investable assets) spend on average only 11.8% of assets. Some are actually growing money: For the low-income group, 35.1% had 20% of assets left 18 years after retiring, and 35.1% had more than 100% left.
Lucas agreed that some people are running out of money in retirement, but many are refusing to spend and are living below their means. Are they doing so out of fear, or do they just not need as much?
According to Lucas, in the SOA study, some said they have enough to cover expenses with some left over to continue to grow, and some are comfortable with Social Security and pension income and feel they don’t have to overspend to enjoy themselves.
Some switched from spending on wants to spending on needs. Lucas cited reports saying that retirees don’t want a lot of “stuff” in their lives; they’re not as materialistic. They are buying the cheapest things and traveling the cheapest way because they want to conserve their money.
However, according to the EBRI study, people are less confident about medical expenses and long-term care in retirement. Only 16% are very confident about long-term care, only 26% about medical expenses, and around 36% about covering basic needs.
Still, EBRI found, the reality of out-of-pocket medical costs, despite estimates, is that, for the majority of people who died at age 90, the median out-of-pocket medical costs were only $27,000. Of course, medical costs can be very high for some. At the 90th percentile, cumulative medical expenses were $172,000, in the EBRI study.
So for some retirees, the motivation to protect their nest egg and spend less is either that they are happier having that nest egg endure, they want to leave an inheritance, or they need less. Other retirees, however, spend less due to the potential for financial shocks, too much uncertainty and lack of knowledge.
What can the industry do to increase certainty, reduce fear and insure future retirees against financial shocks? Lucas said plan sponsors should think about their strategy regarding keeping people in the plan or not, and also ask themselves if they want to have a retirement investment tier. For policymakers, Lucas said, the advice is to shore up Social Security and Medicare and issue a legislative safe harbor for plan sponsors to adopt income solutions. Finally, she said, the industry could better tailor retirement income products to retirees’ actual spending patterns.