The myth of outliving your retirement savings

When Doug Anderson retired as an electrician at the end of 2016, he worried he would run out of money. So he put himself on a miserly spending plan.

A financial planner disagreed, however, and assured Anderson that his pension and savings would be plenty for a lifetime. In fact, the planner told Anderson to give himself a break and have some fun.

In response, Anderson, 67, and his wife, Pam, 65, took three driving vacations last year from their suburban St. Paul, Minn., home. Anderson also treated himself to a used Chevrolet Silverado pickup.

“It’s beautiful,” said Anderson, who rarely indulged himself while working and raising six children. “I roll down the window, stick my arm out, play retro music and turn back the clock 40 years.”

Most retirement research points to an impending retirement crisis for about half of Americans who save too little. But a new study suggests that behavior such as Anderson’s makes the outlook far less dire. Because people worry about outlasting their savings, most adjust by living humbly — often overly so. Consequently, they make even modest savings last for years longer than expected by researchers.

While some people do run out of money, a person with less than $500,000 in savings, on average, spends just about a quarter of it during the first 20 years of retirement, according to a study by Sudipto Banerjee of the Employee Benefit Research Institute.

One-third actually end up with a nest egg larger than they had when they left their jobs, the study says. Even people who had only $32,000 shortly after leaving the workforce had about $24,000 left some two decades after retiring.

Rational behavior defies the assumption in many studies that people exhaust their savings and live in crisis, Banerjee said. He used government data from the U.S. Health and Retirement Study 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. Individual homes were excluded, although people with homes and pensions stretched their savings the furthest.

“People don’t know how long they are going to live,” said Lori Lucas, the president and chief executive of the Employee Benefit Research Institute. “They may also be afraid of facing catastrophic health care costs if they need to stay in a long-term care facility for a prolonged period.”

Those uncertainties are valid, yet many people overdo frugality, said Brett Anderson, the financial planner who urged Doug Anderson to treat himself a little. (The two men are not related.)

“I have a lot of clients who are very well off financially and live in trailers in Florida,” said the Hudson, Wisconsin financial planner. “They are quiet millionaires.”

The EBRI study found conservative spending among every income group.

“People don’t want to touch their nest eggs,” said financial planner Anderson. “They feel fine spending interest or income from their investments but are reluctant to touch anything else.”

Financial restraint

In the EBRI study, those with the most savings — a median of $857,450 shortly after retiring — still had $756,300 two decades later. The decrease amounts to just 11.8 percent of the original sum.

The largest drop in retirement nest eggs, 24.4 percent, was among those with the least savings, or a median of $29,975.

Frugal behavior is consistent with research led by Anna Rappaport for the Society of Actuaries. She and her team found that most people do not plan for retirement or know what they should spend, but they adapt — even when shocked by high dental bills or a roof repair.

What can devastate financially are divorce, caring for a mentally or physically ill adult child who cannot work, and long-term care expenses, according to the actuarial society’s research.

Still, debilitating health care costs are far more rare than people fear, according to the EBRI research. Half of retirees face no nursing home expenses because Medicare covers short recoveries after hospital stays and Medicaid can help when resources run out.

The medical annual out-of-pocket spending for 90 percent of retirees is just $2,000, and the big nursing home costs over $87,000 hit only 10 percent of people living longer than 95, according to the EBRI study.

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