Why Retirees Spend Less Than They Can Afford To

FORO, or fear of running out of money, is a constant low-level (and sometimes high-level) anxiety felt by countless retirees. For many, it is a major reason for spending less than what their advisors and academic research suggest they can safely spend.

A recent study in the academic journal Financial Planning Review by David Blanchett, the head of retirement research at Prudential Financial, may provide insight into this phenomenon by examining actual spending patterns in retirement. He found that contrary to many financial models, inflation-adjusted spending in retirement isn’t constant but tends to decrease over time—even for retirees with more than enough savings to keep up with inflation and live comfortably.

“While some of the reduced spending can likely be attributed to retirees who need to cut back because they are underfunded, this analysis suggests even those retirees who could materially increase spending do not tend to do so,” Blanchett wrote.

Why is that?

While the research doesn’t go into those motivations, let me posit four possibilities:

First, some people are naturally frugal or have become so accustomed to being frugal during their working years that they are uncomfortable spending more in retirement, even if the numbers indicate they can afford it.

Others, often those without an advisor, simply don’t know how much they could safely spend without running out of money. As a result, and because of FORO, they err on the side of caution and underspend.

The natural effects of aging are the third, and probably most significant, factor in underspending. Take traveling. I remember the excitement and fun of getting on a plane and going somewhere I’d never been. Now, when I think of the crowds, hassles and general unpleasantness of flying, I’d rather stay home. And I’m sure that when my wife and I are in our 80s and have more aches and pains, we’ll be just as happy doing less of the many activities that involve spending.

Finally, there is the FORO reason connected to end-of-life medical and healthcare expenses.

Due to what I think are the prudent financial steps my wife and I have taken over the years—including delaying taking Social Security benefits until age 70, buying long-term care insurance, and annuitizing part of our retirement savings—we don’t worry about running out of money even if we live into our 90s. But that’s assuming our lives don’t end in a bonfire of medical/healthcare spending. And that’s where I think rational FORO enters the picture for many retirees.

Who knows what each of our end-of-life years will look like? As my grandmother used to say, menschen tracht und Gott lacht, which is Yiddish for “people plan and God laughs,” with the Almighty’s “laugh” being wry amusement at our mortal conceit.

Funnily enough, David Blanchett draws on a laugh analogy to describe what actual retirement spending probably looks like. Rather than the flat, inflation-adjusted spending most financial planning models assume, he found that annual spending tends to decline slowly from 65 through about 77, then follow one of two patterns. Spending either continues to decline through age 95, which shows up as a “smirk” graphically, or steadily rises in what graphically looks like a “smile,” probably due to rising healthcare spending.

“Smirks” may be more common than “smiles,” since Blanchett notes that the average retiree has historically not experienced significant healthcare expenses, pointing to a 2018 study which found that among those who passed away at the age of 95, the median cumulative real lifetime unexpected out-of-pocket medical expenses were only about $50,000 compared to roughly $250,000 at the 95th percentile. He also cites work by economist Andrew Biggs, which questions whether there is really a retirement “crisis” in which running out of money is commonplace. Those data may calm some FORO fears. Still, Blanchett notes that “health care risks are a clear wildcard when it comes to planning for retirement given the significant amount of idiosyncratic risk present, at least in the United States.”

Since it’s the possible surge in end-of-life medical/healthcare spending that’s the big question mark in retirement planning, here are some ways to manage FORO:

Plan prudently for a long retirement.
Don’t kick yourself for modest splurges in early retirement because you’ll likely spend less as you age.
And don’t feel guilty or think you’re crazy for wanting to have some extra money stashed away—just in case—for when you’re very old and might need it.