You Saved for Retirement. Now Comes the Hard Part

On a recent episode of The Long View, we talked to Jean Chatzky about her book, The Forever Paycheck, as well as annuities and financial fraud. Today we’re highlighting an excerpt from that conversation in which she explains why many retirees struggle to spend their savings.

Why Retirees Struggle to Spend

Amy Arnott: Why do you think it is that so many people, even retirees who have more than sufficient assets to support their spending, are still reluctant to spend? What do you think are some of the main factors that are contributing to that?

Jean Chatzky: I think it’s twofold. First, it’s really complicated. When you look at the maze of accounts in which we hold our money—taxable, tax-deferred, Roth accounts—and the penalties that we could hit if we do it wrong in terms of things like IRMAA for Medicare or getting kicked into a higher tax bracket, it becomes this very, very difficult math puzzle to figure out how much and what to pull from which accounts at what time. There’s also a huge amount of fear that if you do it wrong, you’ll run out of money, you’ll blow through your resources too fast.

But the other factor is this emotional gate that seems to go up for people when they’re asked to flip the switch from accumulation to decumulation. It just turns out to be highly uncomfortable. Part of that, I think, is, again, the fear factor, but part of it is that we’ve gotten so used to saving money for 30, if not 40, years.

We’ve bought into this language of paying ourselves first and maxing out our retirement contributions and grabbing all the matching dollars, so to ask ourselves to one day just wake up and do the opposite is really, really difficult. And while we have these behavioral finance helpers that have been built into the accumulation process, things like auto-enrollment and auto-escalation of contributions and target-date funds to make sure that we’re investing appropriately, none of that stuff exists for spending.

Many Retirees Aren’t Touching Their Principal

Christine Benz: You had a great section in the book, Jean, where you talk about just the mental accounting aspect of spending income—that we’re all used to spending income from our paychecks; we’re not used to spending from our assets. I thought that was such an astute point.

Wondering if you can kind of unpack that for us because Amy and I have talked between ourselves about how, just logistically, extracting cash flow from a portfolio with a total return approach is harder than just spending dividends. Maybe these people who are really focused on dividends aren’t so irrational; it’s just easier to use dividends for your spending money. Can you talk about that issue of income versus assets?

Chatzky: Sure. There’s some really interesting research to back me up. When you’re receiving a paycheck, the nice thing about it is the frequency; you know that you got one today, you’re going to get another in two weeks, you’re going to get another in two weeks again. That money is going to keep replenishing itself. Even if you do spend every dime that comes in through that paycheck, there’s another where that came from.

That’s not true of assets. When you’ve got a chunk of money sitting in a retirement account, chances are pretty good that somewhere along the way, as you accumulated it, you anchored to a particular number. You focused on, I really want to have $1 million for retirement or $2 million for retirement, and maybe you were even successful, and you got there. Seeing that number then begin to fall is, once again, really uncomfortable.

I saw this with my mother. When my mother inherited from my father—my father passed away about 20 years ago—my mother was fortunate enough to have his pension because he spent some years as a teacher. She had Social Security; she had a paid-off apartment; she had a decent long-term-care policy, which was a nice back-pocket sort of safety net for her. And then she had this retirement portfolio that was worth $1.6 million. And she was very, very happy to spend the pension, to spend Social Security, to spend the income from that $1.6 million, but she didn’t want to see that number go down. In fact, when she died more than 20 years later, she had a little bit more than that.

That’s what we’re seeing across the board. We’re seeing studies point to the fact that many retirees are not spending anything in terms of their principal.