Tired of levitating frogs and determining why pants explode, the eggheads have turned their critical eyes to you, retired persons. More pointedly, how you spend your money. Articles in both the Wall Street Journal and Bloomberg Business this month highlight a growing trend: retirees spending less in their retirement. They have their conjectures why and the data to back those conjectures up. Interested? Read on…
Bloomberg Business tackled the subject with an article they put out last Tuesday, the 16th, titled “Rich Retirees Are Hoarding Cash Out of Fear” (read here). Their proof is pretty solid. They referenced the work of United Income, who dug into University of Michigan survey data on the value of estates and the age of the person who passed on. Over the past 20 years, people who passed in their 80s had more money than people who passed in their 70s, who in turn had more money than those dying in their 60s. And yes, this includes the post-2008 timeframe.
In a period of life where they’re technically supposed to be decumulating wealth, Americans are accumulating wealth.
How? There’s not a unifying market trend or sure-fire stock that they’re all invested in that’s growing their portfolio exponentially. They’re just not spending as much. On average, about 2.5% less each year they’re retired. But retirement is supposed to be a time for retirees to dig into the savings and start checking off items on the “One Of These Days…” list. So what gives?
The Bloomberg article cites a Texas Tech professor who notes that retirees who give up their paycheck and are forced to start pulling from savings are scared—terrified to see their funds go down. Though they knowingly gave up their regular income, they can’t bear to see their account balances drop by even a little bit.
The Wall Street Journal article (read here) doesn’t give fear the top billing, they attribute the wallet-clutching to pessimism. The WSJ quotes the former chief executive of HelloWallet (a Morningstar subsidiary), who says that our ability to reliably anticipate the future weakens with age*. Thus, he says, most retirees are not enjoying retirement in the way they should.
He then references the same Michigan data used by Bloomberg, calling out an “optimism gap” between late Gen-Xers & Millennials and early Boomers. In 2014, adults over 64 were 30%-40% less optimistic about their personal future financial health and the financial health of our country than were those under 35. Highlighting this, he pointed to Michigan survey data determining that, from 2002 to 2014, folks older than 64 gave the market a better than 50% chance of rising for the year exactly one time in that 12 year span. The S&P 500 finished the year higher than it started in all but two of those years.
Solutions? From the Bloomberg piece, those terrified of seeing their balances drop and missing that regular stream of income from paychecks can always look to annuities with income riders and bond ladders. They also recommend getting used to spending by making a blockbuster purchase right out of the gate… which is kinda like taking someone terrified of heights and pushing them out of a plane. Your mileage may vary.
The WSJ offers more nuanced suggestions: know that, as you age, you will generate a cognitive bias towards your pessimism that you should try and counteract. Also, segmenting your money—isolating the funds that keep your roof over your head and your bills paid into a conservative “bucket”—is a good idea.
So if you’re reading this article under the one light you have lit in the entire house while sipping on a cup of coffee that you’ve reheated twice, wondering which one of you is the economic pessimist… I hate to break it to you. It’s probably everyone in the house. But if you want to come in and talk about your plan, make sure your bills are covered regardless so that you can get out there and live a little, we can always find time to talk. Let us know!
* When I first read this, I read “anticipate” as “predict” and was confused at the lack of accurate fortune tellers in our youth.