Why Retirees Struggle With the Transition From Saving to Spending

On this episode of The Long View, Anne Tergesen, a reporter covering retirement for The Wall Street Journal, breaks down the current retirement system in the US, her research with real-life retirees, and if we are facing a retirement crisis today.

Here are a few excerpts from Tergesen’s conversation with Morningstar’s Christine Benz and Amy Arnott.

Key Trends on Retirement Decumulation From the Employee Benefits Research Institute

Christine Benz: Discussing retirement decumulation more generally, you recently wrote about the age at which people are retiring, and you were examining data from the Employee Benefits Research Institute. What are some of the key trends there?

Anne Tergesen: I’ve covered that Employee Benefits Research Institute study for years. And the great thing about that study is that I think it has been going on since like 1990 or something. And they ask a lot of the same questions year to year. So, you have these directly comparable data points. And over time, I just started noticing that everybody says they want to retire later than they do on average. To me, that was kind of interesting. And we turned that into an article that really resonated with readers. And I think that data shows that people want to retire at say 65, 66, but they really are retiring at more like 63. And often, people speak to these unexpected things that happen, whether it’s layoffs, often it’s health issues, whether it’s their own health or somebody else’s health and they need to provide caregiving. I think that’s just a very, very persistent, common trend over time. Even over those years since 1990, we have seen the US retirement age go up. But often, I think people are maybe a little overoptimistic about how long they can continue working.

The Psychological Hurdle of Transitioning From Saving to Spending in Retirement

Amy Arnott: One topic that has come up frequently on this podcast is how difficult it is psychologically for people to switch from saving to spending. Is that something that you’ve encountered in speaking to actual retirees?

Tergesen: Absolutely. I think for big savers, that is a huge thing. And I think some of it, it’s so interesting. I think it’s a habit. I spoke to one guy who retired at 60, and he had a decent amount of savings, approaching $5 million. And he said that it was just that he had just lived for so long, he’d lived very well, but he had lived relatively modestly compared with what his means would have allowed. He had a nice house, but it wasn’t like the big giant house. He had decent cars, but they were, I can’t remember whether they were used cars. He didn’t go in for the big splashy lifestyle. Instead, he saved a lot of money. And he said, when he started his retirement, he spent a huge amount of time running around, comparison shopping, and just looking for the cheapest paper towels. And then a couple of months into this, he just thought, “This is ridiculous. This is making me miserable. I can’t pinch every penny. I have to have some faith that I’ve saved adequately.”

And so, luckily in his case, he really did. Same thing with a guy I spoke to recently who has a real estate portfolio that is worth, approaching $10 million, I think he said. It just was a habit. And he and his friends would sit around and they had conversations like that where they were coaching each other on how to let go a little bit and have more fun. And he’s now starting to travel more, but he said it just took him time to realize that he was going to have enough.

How Retirees Are Approaching Spending and Decumulation Today

Benz: Another dimension of retirement decumulation is just figuring out how much you can spend. You and I have talked about this. And also just figuring out how to extract cash flows from a portfolio. When you’ve been in savings mode and you’ve been accumulating, it’s kind of a different problem versus the spending in retirement. I’m curious, when you talk to actual retirees, do you hear from them that that is something they struggle with, figuring out safe spending rates as well as how to construct their decumulation portfolios?

Tergesen: Interesting. I feel like some people have a strong preference for income investments. I think just because that kind of does the work for you. So, if you’ve got dividend-paying stocks and bonds and so on, they live off the income and Social Security. If they’re lucky enough to have a pension, that’s kind of the way they go. Other people have financial advisors who do that for them or help them with it. And then other people who are living off Social Security, it’s just that’s just the way it is. It’s a monthly budget. So, in a way, nobody’s really coming to mind in terms of speaking to that issue. I feel like people have their guided ways, whether it’s income investments or a financial advisor, I feel like they seek some kind of help often.