Episode 46 Transcript
Retirement Spending Fears: Why Even Wealthy Retirees Hold Back

Introduction

Madison: Hello, everyone, and welcome to Not Just Numbers, Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora, and I’m here with Mike Garry. Mike is a financial advisor and a CFP practitioner and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer, and his law firm is Yardley Estate Planning. Hey, Mike.

Mike: Hey, Maddie. How are you?

Madison: I’m good. How are you?

Mike: Good. Another non-Monday recording.

Article Summary

Madison: Yeah. All right. So today we are going to discuss an article from the Wall Street Journal. It is titled “Even Rich Retirees Fear Outliving Their Money” and this is by Anne Tergesen. All right. Many retirees fear outliving their savings, leading them to spend conservatively despite often having the financial means to enjoy retirement more fully. This trend, called the “retirement consumption puzzle”, is especially common among wealthier retirees who could afford to spend significantly more while still preserving a financial cushion. A reluctance to draw from retirement accounts is often driven by fear, uncertainty about longevity and market performance, and psychological barriers to spending after decades of saving. Studies show that those who spend more in retirement tend to report greater satisfaction. Financial experts recommend using lifetime income sources like Social Security, pensions, and annuities to cover essential expenses, which can help retirees feel more secure about spending savings on enjoyment and experiences earlier in retirement, when health tends to be better. Examples like Jay and Anita Myer highlight how financial reassessment and prioritizing family and travel can lead to greater contentment. Experts suggest retirees identify meaningful spending goals and give themselves permission to use their wealth emphasizing that dying with excessive savings may reflect unnecessary sacrifice. Financial planning tools, such as earmarking specific accounts for travel or gifts can help retirees strike a better balance between security and enjoyment.

What factors contribute to the retirement consumption puzzle where retirees spend less than they can afford?

Madison: All right. What factors contribute to the retirement consumption puzzle where retirees spend less than they can afford?

Mike: Well, I think the biggest, there are a lot, but I think the biggest is that most retirees have just saved for the last 45 years to get to retirement age and are used to having amounts added to their 401(k)s or 403bs or IRAs, or their brokerage accounts and the savings accounts, you know, they’ve probably paid for a lot of stuff for their housing. They probably have contribute money towards their kids. And getting to a point where you’re just spending for your living and you’re not earning to make that living is a big adjustment. It is a big psychological adjustment. I think that a lot of our clients, it was a much, much harder to go through it psychologically than it was financially. Like, we know that they could afford it and we know we’ve had experience with others who have gone through by now like 20 years of retirement, and it works. You know, if you plan for it, we know what they can afford to spend, but people have a hard time with it. You know, and then the longevity, not knowing if you’re going to have outsized nursing home care or other kind of physical ailments in the future that you can’t predict. You know, you hear a horror story once in a while about somebody who needs, you know, 10 years in a nursing home or something. And people are afraid that that could be them. Right? So you don’t want to run out, but you need to balance your safety and caution with actually enjoying the money that you have. I mean, that is why you saved for the 45 years, so that you wouldn’t have to work your whole life. And we are fortunate, the last couple of generations of Americans have been able to retire mostly at decent ages. And Social Security has really lowered the amount of elderly poverty. You know, before that old people used to be poor because they stopped working and they would slowly run out of money. And that is generally not the case anymore. There’s some, some level of minimal subsistence for our poorest citizens. And a lot of middle class and wealthier citizens can live quite well in retirement, with a lot more than they ever thought they’d have. And Social Security benefits for people now, sometimes are stunning to me. People can retire now at 70 and have like between a couple have a hundred thousand dollars of Social Security. You know, like it is really something. So yeah, I mean that’s the biggest thing is like the fear and the psychological change of spending instead of saving.

Is that a common situation that you deal with your clients?

Madison: Yeah. So, is that a common situation that you deal with your clients?

Mike: Yeah, I would say that it’s mixed. You know, like, just like in, in pre retirement, there’s some people who probably spend more than they should, and a lot of people get it right. Like, it seems comfortable to them, like they’re saving at a normal amount and everything’s fine. And yeah, there’s some that they just really can’t let go and feel like they still need to hold on and not spend anything. You know, Maureen here is great. When we have, like, financial planning updates, you know, we use the Monte Carlo simulations in the financial planning software to show people, you know, the chance of their retirement working out. And you know, it runs all kinds of simulations and it comes up with their percentage. And we look for a percentage that’s in like, the 70 to 80% range. Because, you know, most people aren’t going to have, like, the worst scenarios or a bunch of the worst scenarios. Right. So you don’t have to plan as if your life is going to be the absolute worst. And a lot of times you can make simple adjustments if there’s an issue. Right. So maybe not take as much money, adjust it for inflation the next year, or maybe cut down a trip here or there. So we look for that 70 to 80% success rate. But, you know, we have people in the 90s and what we say is, like, that might feel good because you want to get 100 on your test. Right. Um, and it doesn’t come back with 100, 99 is the biggest it’ll come back with ever. But if it’s that high and you’re not doing things that you could easily afford, that’s not necessarily the best result. Right. Like, the best result is enjoying your retirement and, you know, having the kind of life that you want to lead. And if you can afford to do that, then I think that you should. I mean, if you can’t afford to do that, then you need to save more or work longer. But once you get in a point where you can afford it and you just aren’t like, I’m not a psychologist or a psychiatrist, so I can’t help with that. But, you know, we could lay out the facts for people, and sometimes it doesn’t work, you know, and then we see people, you know, five years after they retired and their Monte Carlo number is even higher, and, they’re spending like 1% of what, you know, their account value. And it just keeps going higher and higher and you know, like my fear is that they might finally believe us at a point where they’re physically not able to do the things that they could have done in their 60s. You know, it’s just a normal fact that a lot of people have a lot more physical vitality in their 60s than they do in their 70s or 80s. And so you need to balance your spending through retirement like that. I really just think it comes down to planning and getting comfortable with the plan and working through it. But yeah, we see it all the time.

Why might wealthier retirees be more prone to underspending than those with fewer assets?

Madison: Yeah. All right. Why might wealthier retirees be more prone to underspending than those with fewer assets?

Mike: Well, a couple things. First, they might have become wealthier because they saved more earlier, right? So like they might be wealthier clients or wealthier people because they saved more. And so like maybe it is their lifelong saving habit that is stopping them from spending more, spending like as much as they can or reasonable, more reasonable, amount rather than like the bare minimum. And then also it just because like because they are wealthier that would mean they can afford to spend even more. Like maybe that much of a lifestyle is too much in retirement, right? Like if you could afford to spend $300,000 a year in retirement but you’re living in a paid for house and you buy a new car every five or eight years and you take one or two trips, you know your life is just not going to be that expensive, right? And so you know the flip side of making sure you know what you could afford to spend and not being afraid to spend it is, the flip side is, like don’t just like recklessly spend it to spend it. You know and I don’t think we’ve run into that ever. I don’t think or not very often. So I mean, if somebody has a lot of money and they could spend more, you know, they don’t necessarily have to go to like a life of decadence to spend all their money. So I think part of the reason why wealthier retirees don’t spend as much as they could is because like how many cruises can you go on? How many, you know, jets can you water ski behind? You know, like there are limits what people will do in their lifetime, most normal people.

How can financial advisors help retirees feel more comfortable about spending their savings?

Madison: Yeah. All right. How can financial advisors help retirees feel more comfortable about spending their savings?

Mike: Yeah, I think what we try to do is show the numbers and show like the cash flow to show like, you know, this is real. You know, you have these investments, you have these assets, you have these accounts, you have Social Security. Sometimes people have pensions and other savings. What we’ll do is we’ll go through and show them, okay, this is your projected income from these things. This is what we expect you to spend over these years. This is how much in taxes. And really try to put like, try to make it more real instead of just like, oh, you have these accounts with X amount of money and maybe you could do something. Show the actual cash flow. Say like, hey, well you know, if you’re going to have $30,000 Social Security income and your portfolio can easily give you fifty thousand dollars a year, then you know, your six thousand dollar month spending goal is entirely reasonable. You know, and then sometimes that works and sometimes it doesn’t. It works more often than not. And you know, if people who are afraid to, people who aren’t spending as much as they can, you know, one thing I don’t know the article talked about it is maybe it makes them happy. Maybe like saving and not spending much makes them happier than taking an extra vacation a year would. And maybe they want to give money to their kids or to charities when they pass, having more for that means more to them then doing more in retirement. Right. Like we all respond differently to different things. Right. That’s why it’s not just vanilla.

How can retirees balance financial security with enjoying their retirement?

Madison: Yeah, that’s true. All right. How can retirees balance financial security with enjoying their retirement?

Mike: Yeah, I think you have to run the numbers, you know, like the couple did in the article. You know, he thought he was getting so stressed because they were spending more than he thought they were going to. Then when he ran the numbers he realized he could spend a lot more than that. Right. So like go through it, see what you, your expectations are, see what your lived experience so far is. And see what you think you can afford. And if you need help with an advisor, then do that.

How can specifically creating specific budgets for hobbies and goals help retirees prioritize meaningful experiences when deciding how to spend their wealth?

Madison: Yep. All right. How can specifically creating specific budgets for hobbies and goals help retirees prioritize meaningful experiences when deciding how to spend their wealth?

Mike: Yeah, Well, I think there was a piece in the article where a couple segregated some money set aside for future trips. I think that I had never heard that before, and I think that could be a wonderful idea for people. You know, if you know that you have enough and you know that you might have trouble spending something, but if you could carve out some dollar amount or some percentage and, you know, move it to a separate account like they did and say, like, hey, this is our funding for trips, I think that’s a great idea. And if it gets to be low and you can’t take more trips, well, then, you know, you can’t take more trips. Or if it gets to be high and, you know, and you take the trips you want and it works out, that’s great. You know, I think it was a good idea. One of the things I love is that people are endlessly creative with trying to come up with ways to be successful and do what they want or need to do. I think that was a great idea. I hadn’t seen it anywhere. It’s kind of a version of people use buckets. Like, we have all of our money, we’ll put it into, like, eight different buckets to mentally, mental accounting. Like, oh, this is for this. This is for that. This is the other thing. You only using a bucket for the one thing I think makes a lot of sense.

Madison: Yeah. Yeah. Whatever makes anyone feel comfortable. Right. I mean, like you said, everyone’s different.

What lessons can be drawn from experiences of retirees like Jay and Anita Myer when adjusting retirement spending habits?

Madison: All right. What lessons can be drawn from experiences of retirees like Jay and Anita Myer when adjusting retirement spending habits?

Mike: Sure. That’s a couple who, he was stressed because they were spending more than they thought they’d spend. But then he reassessed and realized that they could spend a lot more than that. And then they made some specific changes, like they’re going to go spend more time with family on vacations and give some money to their adult kids. It was great. I think that they were a great example. Right. Like, he’s so stressed thinking one thing, but then he looks at it again, it’s like, oh, what am I doing? You know, and now he’s going to make significant changes. I think that’s great. You know, it really does help to take stock of where you’re at and reassess, you know? You know, he’s thinking things changed in a bad way in one sense. But when he looked at the overall big picture, he realized they could do so much more than they were doing. And now he’s not stressed.

Outro

Madison: Yeah. For more information on Yardley Wealth Management or Yardley Estate Planning, you can visit our websites at yardleywealth.net and yardleyestate.net. you can also follow us on socials at Yardley Wealth Management. Don’t forget to smash the like button, if you enjoyed this episode. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.