Wealthy retirees are not spending enough money to run out of cash before they die and many see their bank balances increase rather than shrink.
Researchers scrutinised the spending patterns of hundreds of retirees aged 65 to 70 and found the assumptions of financial advisers did not reflect the way they managed their finances.
A team from the Texas Tech University found that IFAs assumed retirees spent the same amount of money every year in retirement and that they depleted their savings at a steady rate reach year.
In fact, the study showed that the richest retirees spent nowhere near the amount their advisers assumed and instead failed to spend their income and increased their savings.
According to IFAs and financial firms, retirees save during their working life to defer income they will spend later.
Flawed models
To do this, most financial models take the view that financial assets will deplete in retirement on a smooth path that is roughly equal to pre-retirement spending.
One of the leading retirement spending models, put forward in 1994 by William Bengen argues that if someone takes 4% a year income from their savings adjusted for inflation, their capital stays at the same level throughout retirement.
Later analysis sets the figure between 5% and 7% due to the current environment of low interest rates.
“However, retirees seem to spend much less than theory would predict. Rather than spending down savings during retirement, many studies have found that the value of retirees’ financial assets hold steady or even increase over time,” said one of the report authors Chris Browning.
“This unwillingness to spend from assets can result in a gap between the amount retirees could safely spend and their actual spending during retirement.”
Working out what to spend
Browning’s conclusion is many retirees could spend a lot more and enjoy a more comfortable retirement without worrying about running out of cash.
He also agrees working out the precise amount to spend is complicated.
“For retirees to determine optimal consumption in each retirement period, they must estimate longevity, investment returns, medical costs, social security benefits, bequest motives, and pension benefits,” said Browning.
“Factors that are certain, such as social security and pension benefits, can be easily identified and incorporated into decumulation decisions. Uncertain factors may overwhelm a retiree faced with the challenge of drawing just the right amount of income from savings each year.”
