Jan 4, 2022
Many retirees have a big problem. It isn't what you think.
With inflation causing stress in all age groups, here are some reassuring words for retired people concerned by warnings that they should only be tapping 3 per cent instead of 4 per cent of their portfolios: Keep calm and spend on.
Of course, this doesn’t apply to a lot of retirees, but the sort of person who worries about appropriate withdrawal rates is probably diligently saving for retirement, or already has. A bigger problem, according to financial advisers, is that too many of their clients don't actually spend enough of the money they have squirreled away. They're so paralyzed by the risk of depleting their savings, they scrimp more than they need to.
It's a good reminder of how retirement planning depends on emotional factors that are separate from the risks associated with, say, inflation or lower bond returns. A lot more goes into estimating how long you'll live or how much you want to leave to your children than algorithms and actuarial tables.
First, it's helpful to think of any suggested withdrawal rate — 3 per cent or 4 per cent — as purely a starting point. Personal situations and preferences will dictate whether the amount should be higher or lower. Also, remember that most models detailing what a "safe" amount to spend in retirement is assume the same fixed amount of portfolio withdrawals every year. Few people actually live like that.
It's also useful to consider the percentage of assets that are guaranteed, such as Social Security benefits and annuities, when calculating an appropriate spending amount in retirement. A study by David Blanchett, head of retirement research at investment management firm PGIM, showed that guaranteed income had the biggest impact on optimal withdrawal rates compared with other variables such as projected portfolio returns.
So go ahead and remodel your kitchen, or whatever else you had hoped to do in retirement, such as travel, when the pandemic passes.
Milo Benningfield, a certified financial planner in San Francisco, says that he had clients before COVID-19 who put off traveling because they were worried about spending too much early on, but then had health issues and never took their dream vacations. The pandemic has only made those missed opportunities more obvious.
Another certified planner, Jeremy Portnoff, in Irvine, California, says he has a client whom he has to remind to spend money. “There is a mental shift that happens once the paycheck ends, and for many anxiety sets in and they go into preservation mode,” Portnoff says. The passage of time, which allows for more comfort with being retired, along with reminders of how portfolios have been allocated to withstand different scenarios, can help.
Sometimes using an online mortality rate calculator can clear out some of the psychological thoughts around longevity, like thinking you'll die close to when your parents did. The American Academy of Actuaries and Society of Actuaries have one available called the Longevity Illustrator that can be used for couples, too.
For those who continue to worry about outliving their savings, purchasing a low-cost annuity may be a better solution than continuing to withdraw paltry sums from portfolios.
A similar approach can work for long-term care costs. Rather than living too meagerly out of fear of unknown, exorbitant health expenses down the road, those who are single with no potential relatives to assist with care may want to consider purchasing a long-term care policy.
But many are suspect of the policies or recoil at their high premiums. Another option is to set up a separate account that could be used to fund a certain period of time for care. Studies show the average time needed for long-term care is about three years. (Women tend to need 3.7 years, while men require 2.2 years.)
Finally, sometimes the reason for overly conservative retirement spending is the desire to leave money to children or grandchildren. That's benevolent, but it's usually more productive to figure out why that's a priority, and to set specific amounts and for whom, rather than having abstract goals to make sure family members are "taken care of." Try taking care of yourself first.