Retirees:  It’s Okay to Spend

by Jane Bennett Clark for Kiplinger’s Personal Finance

November, 2016

“My mom enjoys a comfortable retirement, but she isn’t rich. A few years after my dad died, she sold her house. She used part of the profit to pay the big entry fee for the retirement community where she now lives, and she invested the rest. That amount, with her IRA, represents her retirement nest egg. Now, 12 years later, her stash is about the same as it was when she moved into her new home. But at age 91, she’s still cautious about spending down her retirement savings.

Her restraint isn’t unusual. A recent report by Chris Browning, Tao Guo and Yuanshan Cheng at Texas Tech University showed that most retirees of moderate means, as well as those who are affluent, don’t even spend all of their income from Social Security, pensions and investment earnings, much less draw down the principal in their nest egg. Their assets either stay about the same or grow over their lifetime. The wealthier the retiree, the bigger the gap between income and spending, and the more the savings pile up.

Even when retirees do tap their retirement savings­—as they’re required to do from tax-deferred accounts starting at age 70½—they don’t necessarily spend what they withdraw. A recent Vanguard study of retirees with at least $100,000 in household wealth showed that most of them took their required minimum distributions and reinvested one-third of their withdrawals.

Why do retirees resist spending their hard-earned (and hard-saved) money? Wanting to leave something to the kids is one reason (thanks, Mom!). But the bigger one is uncertainty. You can’t predict how long you’ll live, how your investments will perform over 20 or 30 years, or whether you’ll be hit by big medical or long-term-care costs, so you keep a cushion. In fact, that approach makes sense if you’re relying largely on savings to cover costs.

Failure to plan and lack of confidence also play roles in underspending.”  Read more