Why Affluent Retirees Are Cutting Back on Spending Part I

After years of being focused on managing personal finances to ensure they have the resources available during retirement to sustain their lifestyle, there is a new trend growing in America. Instead of kicking back and enjoying spending their life savings, affluent retirees are cutting back and being frugal.

A Vanguard study estimates that affluent retirees spend only 60 percent of the money they withdraw for retirement. They are spending the majority on routine expenses (mortgage, household transportation, etc.) or discretionary expenses (medical, entertainment, credit cards).

The remaining 40 percent, the study found, was moved into liquid accounts (CDs, bank savings, checking accounts) for short-term cash reserves and savings. This illustrates how retirees are not spending to their full potential, which may be great for their future heirs but could be preventing them from truly enjoying their retirement.

Why are Retirees Cutting Back on Spending?

Imagine you’ve spent your entire career saving for a long and happy retirement. Wouldn’t you want to enjoy your time and money? You’d certainly deserve it. But as we look further into the research, we find that many retirees aren’t spending to their full capabilities. According to a recent report analyzing University of Michigan’s Surveys of Consumers, many retirees are overly cautious about their future financial status:

  • Retirees are skeptical of future economic growth and financial health - Adults over age 64 years old are 30-40 percent less optimistic about their future financial health, the US economy and the stock market, compared to younger adults.  

  • Retirees are misjudging their lifespan – According to the Social Security Administration, a man reaching 65 today can expect to live, on average, until the age 84.3. A woman turning age 65 today can expect to live on average, until 86.6. A study of people’s beliefs shows that retirees are overestimating their life expectancy.

  • Retirees become more conservative as they age – Retirees are spending about 2.5 percent less on average, in each successive year between 60 and 70. This percentage decrease grows even more in later years.

  • Retirees incorrectly assess their personal financial status – Concerned about finances as they age, retirees aren’t spending. The average retiree who dies in their 60’s leaves behind $296,000 in net wealth, $313,000 in their 70’s, $315,000 in their 80’s and $238,000 in their 90’s.

  • Retirees have a psychological or emotional aversion to spending – Many retirees have spent their entire career saving money and being thrifty with their income. They aren’t comfortable spending down their assets to enjoy their retirement lifestyle.

These findings show why retirees are uncomfortable or are overly cautious in spending their life savings to enjoy their retirement. In Why Affluent Retirees Are Cutting Back on Spending Part II, we’ll discuss how to become more comfortable spending your hard-earned life savings and enjoying your retirement lifestyle without depleting your resources.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

“Finance Made Simple” blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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