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Behavioral Pitfalls in Retirement

Christine Benz

Benz: Andy, I want to talk about the decumulators--people who are getting ready to retire, already retiring. What are some of the mistakes that you see that group making?

Eschtruth: So, that's a very good area, because there hasn't been as much focus on that. Since 401(k) plans came in roughly in the early '80s in a big way, we haven't seen a huge wave of retirees who are primarily dependent on these nest eggs they've built up, and that means that they haven't had to make the choices associated with how to manage a big nest egg in retirement. Your typical retiree to-date, if they've had pension coverage, has just collected a check from the employer, so that's been a very straightforward way. Now in the 401(k) world, of course, everyone has got some little nest egg they're retiring with. If someone did a great job of saving, it's a big nest egg, but at least many people have at least a small nest egg, but people don't know what to do with that money.

Benz: How to turn that into a pension-like paycheck?

Eschtruth: How do you turn that into a pension-like paycheck? So, that's one problem we see, is that there are twin dangers that people face in this situation. One is, they cling to that nest egg because they're afraid of spending it down, maybe they try living off the interest, but they don't really tap into the nest egg at all.

Benz: That's hard these days.

Eschtruth: That's right. Today it's really hard because there's almost no interest.

Benz: Right.

Eschtruth: So one thing is, they're too conservative, and they restrict their own retirement consumption, because they don't realize the potential of what they have.

The other possibility is that they are too liberal. They spend freely with that nest egg and then they think, "Oh, I was only going to live to 78, anyway." And then they make it to 84, and their spouse lives to 90, and they're only on Social Security--so that's another challenge.

Now in terms of the solutions here, it's not as clear-cut, but one thing we would like to see--some of the people that I've worked with and myself--is consideration of using these automatic mechanisms to take part of that nest egg, and turn it into an immediate annuity at retirement. That provides at least a stream of lifetime income that's dependable and you can rely on. That might be one way to go. It wouldn't be the solution to just take the whole nest egg and do that with, but it might put people in a better place.

Benz: One other thing I wanted to talk about Andy is home equity, and how it figures into the overall retirement kitty. Your research has shown that many retiree households have a significant share of their wealth staked in their homes, and yet they have this psychological impediment to actually tapping that equity. Can you talk about what you found there?

Eschtruth: Absolutely. The house is--for people nearing retirement--is the single largest asset that they have outside of Social Security.

Benz: Maybe less large than it once was, but still large.

Eschtruth: Absolutely. So what we saw was there has obviously been a dip in the housing market, a big decline in the housing market, but that was also from a base that was pretty high. So there was quite a big runup before that, and a lot of those gains that people have seen still remain, and hopefully housing prices will bounce back. But in any case, this is still a very big asset for people, and it's one that for the most part people wall off. They put it in a separate box, and they don't think of it as something they would use for their day-do-day retirement consumption.

And they think of it as something they might want to leave to their kids, which is great and totally understandable. They also think of something they might use as a last resort in their planning. If they had to, if one spouse dies and they have trouble supporting the lifestyle of the remaining spouse, maybe they would tap into the house, they would sell it, and move to a small apartment or something like that. So they have used it as a last resort.

But we think with the size of the asset and the other retirement challenges that people are going to be facing that many people are not going to be able to afford to just wall off the house and not think of it. And so there are ways that they can do that--of course, they can always sell their house and move to a less expensive house; they can take out a reverse mortgage, which is another option; and today, hardly anybody is doing that. They tend not to draw on their home equity at all until very late in life, when they have to tap into that last resort.

One thing we think that people need to overcome is ... the emotional attachment that's associated with the home that goes above and beyond mere dollars and cents. Now obviously emotion is important and should be valued, but the issue is that most people who've moved, once they've overcome that barrier, have found that their new situation is better, and they are actually happier. The data we've seen show that people tend to be happier once they move at older ages.

Benz: That's great insight, Andy. Thanks so much for sharing it.

Eschtruth: Thank you, Christine.

Benz: Thanks for watching. I am Christine Benz for