Safely Spending In Retirement

According to researchers at Texas Tech University’s Personal Finance Planning Department, retirees are withdrawing money from their retirement accounts at staggeringly slow rates or not at all.  By doing this, retirees are foregoing a standard of living they could afford on long-standing economic principles. 

Retirees with median wealth have a “consumption gap” of about 8 percent on average, which is a gap between what they are spending and what they could spend.  Retirees with higher levels of wealth have a consumption gap as high as 45 percent.  “This is an example of what economists call ‘precautionary saving.’  People feel a need to hold on to wealth to deal with uncertainty about future spending needs.  The problem is that it comes at a real cost in terms of foregone consumption.”

So, what can retirees do to make themselves more comfortable spending down their assets?  First, retirees could withdraw more by waiting to claim Social Security until age 70.  This would produce the highest possible monthly Social Security benefit. 

Secondly, long-term care insurance is an option to address fears of unexpected health and care costs in retirement.  “If people could be convinced to buy long-term care insurance, and secure enough guaranteed lifetime income in the form of optimized Social Security, pensions and purchasing single premium immediate annuities so that they would have enough income to cover basic living expenses, they would feel much more secure about spending more money in retirement.”

Finally, calculate a safe withdrawal rate.  Knowing how much you can safely withdraw from your retirement accounts will also give retirees more comfort. 

See Robert Powell, Six Ways to Safely Spend More in Retirement, USA Today, Dec. 13, 2014.