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Case Study: Retirees Can Spend Too Little, As Well As Too Much

By , with Annuity FYI

We hear all the time that Americans don’t save enough for retirement. But there are also a sizable number of people, like the Stricklands, who have saved plenty for retirement and then spend too little.

William Strickland, a career construction foreman, and his wife, Elizabeth, a career elementary school teacher, have always been frugal and strong savers. So, predictably, the Connecticut couple has ample funds now that they are retired – about $2.5 million, in fact, plus a nice, paid-off house and two late-model cars. These were bought 100% with cash.

This is great – except that the couple remains frugal. Probably too frugal. As they have all those years they worked, they eat out together only once a week, usually at a modest restaurant, and try to do something else together at least once a week. It could be bowling, or going to a card club or a movie. Whatever it is, it is usually inexpensive. The Stricklands also typically take a couple of week-long vacations most years, which tend to be domestic and also reasonably priced.

We hear all the time that Americans don’t save enough for retirement. But there are also a sizable number of people, like the Stricklands, who have saved plenty for retirement and then spend too little. Obviously, this isn’t altogether a bad thing – it certainly beats being destitute. But it lowers quality of life, especially in the earlier years of retirement, and, some financial planners say, simply makes no sense.

Why Did You Go To The Trouble To Save?

“What is the point of saving money if you’re not going to spend it at some point?” asks Andrew Murdoch, president of Somerset Wealth Strategies, a wealth management firm in Portland, Ore.

One reason people save too much is that retirement planning has become too generalized. Personal finance software and online calculators are everywhere. To make financial planning easier, technology purveyors have built too many assumptions – assumptions that are not accurate for all people — into their technology.

A common rule of thumb, for example, is that retirees need about 80% of their income when they worked to be comfortable in retirement. There is lots of wiggle room in this statistic, however.

Retirees Don’t Necessarily Spend That Much

Many folks, for instance, spend most of their retirement in a home they have lived in for decades and has no mortgage. This is inexpensive. Or consider health care expenses, typically cited as the single biggest expense in retirement. What is often left out of the discussion is that most 65-plus-year-olds have Medicare insurance, an extremely good deal, and many have supplemental insurance to pick up the tab for co-pays and deductibles. The price tag for this insurance is reasonable as well. Long-term care insurance is pricey, but not if you bought it at, say, 50 and continued to pay the premiums.

Also underreported is the fact that median household spending declines steadily and dramatically as people age. Compared to the expenditures of a household headed by a 65-yaer-old, for example, spending falls off 19% by age 75, notwithstanding typical increases in medical expenses, according to the Employee Benefit Research Institute.

Here are five additional insights financially comfortable retirees should weigh:

* People are living longer, but still not as long as many think.

According to the Social Security Administration, a man reaching 65 can expect to live, on average, another 19 years, and a woman another 22 years. Yes, some folks make it to 90-plus, but they are in a distinct minority. More to the point, older people often overestimate their longevity. One study, for example, shows that 68-year-old men have a 71% chance of living another 10 years but on average believe their odds are much higher than that. This mindset exacerbates underspending.

* If you have the money and are healthy, don’t delay spending for fun in the early years of retirement.

Even among the financially comfortable, spending on fun typically declines after age 70. According to the Bureau of Labor Statistics, households headed by someone between 55 and 64 years old spend, on average, $56,267 annually. By contrast, households headed by someone 75-plus on average spend only $36,673 – a decline of 35%.

* Spend – but not to keep up with the Jones.

When you were younger, maybe you sprang for a luxury car not because you really wanted one but because it was a sign of status. You wanted people to think you were doing well. But things change in retirement. As long as it is obvious that you are at least solidly middle-class, almost nobody cares about your wealth. So focus incremental spending on what truly enhances your joy.

If, say, you’re a former frequent business traveler who prefers a suite to a single room – and one with a good view — spring for it. If you like room service, spring for it. And if you want to upgrade seating for a special vacation overseas and can afford it, do exactly that.

* Use your extra free time to have fun, not to try managing your investments.

Now that they have the time, some retirees interested in investments think they are better off managing their money themselves, rather than relying on a financial adviser. Who cares about their money more than them? And why pay a financial adviser’s tab, which is typically 1 percent of assets under management annually?

For most people, money self-management is a bad idea. You may know more than a good financial adviser, but that is highly unlikely, and, remember, he or she also benefits if your assets increase in value. In addition, amateur investors are typically not good at managing risk. Too often, they think the way they did when working – that income of some sort is coming in and they can afford to take more risk.

Prudent risk for part of your portfolio is still OK – in fact, preferable — but it should be just that – prudent. If a retiree, unlike a working person, suffers a permanent financial loss, he or she usually cannot recoup it.

* To repeat, risk – if prudent – is good.

Legions of retirees put money into savings accounts, money market accounts and CDs. These options pay little or close to nothing amid today’s low interest rate environment. People think they are sidestepping risk, but they are ignoring inflation risk and the risk of outliving their money. The buying power of these dollars doesn’t keep up with inflation. So those who invest the bulk of their money conservatively find themselves with a pool of money able to buy less and less.

You need to be realistic about how long your money will be invested, and act accordingly. If you are 65 and your health is relatively good, your money will probably be invested a long time. Say you make it to 85. Then you probably have yet another six years or of expenses to cover.

What counts is not losing some money on paper over the next six months bur how you can make your money last another 20 to 25 years. That means you have to have some money invested in the stock market, which over time has always beaten inflation. And this probably should be supplemented with an equal amount invested in a lifetime income annuity. If nothing else, the comfort of additional guaranteed income helps keep you invested in the market.

The overall lesson here? If you are among those retirees who are relatively comfortable financially – a good likelihood if you are reading this story – make sure you balance having some fun with securing your financial future. As the saying goes, you only live once. Make the best of it.

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