This article is reprinted with permission from NerdWallet. Many American households retire without enough money to maintain their pre-retirement standard of living. However, once retired, people often cut their expenses enough to last their money, according to a recent study by David Blanchett, head of retirement research at Morningstar, MORN, -0.62% and Warren Cormier, Executive Director of the Defined Contribution Institutional Investment Center for Retirement Research of the Association.
“People are finding a way to make it work,” Blanchett says. The findings challenge a common financial planning assumption that retiree spending will increase at the rate of inflation each year. But research also indicates that many people retire without a realistic understanding of how much they can safely spend. Running away versus falling short The fear of running out of money is ubiquitous in the US Nearly half of Americans have this concern, according to the 2019 Aegon Retirement Readiness Survey. And your concerns may be well founded. A 2012 document for the National Bureau of Economic Research found that 46.1% of older adults died with less than $ 10,000 in financial assets. Of course, the phrase “running out of money” is somewhat misleading. The vast majority of American retirees receive Social Security benefits, which continue for life. So while they may drain their savings and run out of money, they really can’t run out of money. See: Will Social Security Still Exist If I Wait To Claim It? Yet few people enjoy the idea of having to drastically cut their expenses in retirement or make a living on $ 1,543 a month (today’s average Social Security check). Spending less lowers the burn rate Blanchett and Cormier studied 425 American households that had at least $ 10,000 in savings at retirement and $ 5,000 in annual Social Security benefits. They found that only 18% retired with enough money to maintain their standard of living. However, over time, most households reduced their expenses and slowed down how quickly they used up their savings. After 10 years, the proportion with sufficient funds to last their retirement skyrocketed to 48%. Also read: We want to leave the cold Midwest states for ‘hotter, drier climates’ and affordable healthcare at $ 44,000 a year, so where should we retire? The research, which was published in September 2020, has its limitations. The sample size was relatively small, did not include the poorest households, and looked only at the first 10 years of retirement. Also, the researchers couldn’t tell whether people were cutting out of necessity or choice. Blanchett believes that many have not given enough thought to how much retirement will cost and are forced to make adjustments as their savings dwindle. “Either they didn’t know how much they needed to save, or they just didn’t (save),” Blanchett says. “They go into retirement and have to start making more difficult decisions.” Some who could spend more do not. However, the researchers also found that many of the households that had enough money spent as if they didn’t. In fact, 29% of the best-financed households actually had more wealth within 10 years of retirement. That resonates with financial planners, who say they often have clients who spend less, sometimes much less, than their wealth could support. Some want to leave inheritances for their children or protect themselves from financial crises, such as long-term care. In other cases, they just feel more comfortable continuing old habits. “If you have a habit of being frugal, you tend to stay that way,” says certified financial planner Dana Anspach of Scottsdale, Arizona. However, people can take frugality too far if fear keeps them from making the most of their retirements, Blanchett says. “You may end up not spending enough money when you could enjoy it more,” he says. A little planning can go a long way. Choosing the “right” level of spending in retirement is not easy due to all the unknowns, including how long your life and future health will be. Having a clear idea of what your expenses are likely to be in retirement, as well as how much income you can expect, can help you create a sustainable spending plan. A good financial planner, preferably a fiduciary advisor committed to putting your best interests first, could be helpful. Your brokerage or 401 (k) provider may also have resources to help guide you. Read next: Whether you’re 55 or 25, do this to secure your future Social Security benefits. A little planning could go a long way for the many people who will not be able to maintain their pre-retirement lifestyle. Blanchett likens it to being able to spot the edge of a cliff in time to prevent it from falling. “It can be a very painful reality for many people when they really understand what they have and what they need,” says Blanchett. “But I’d rather you understand that at 65 that you get to the point where you’ve spent all your savings.” More from NerdWallet Liz Weston writes for NerdWallet. Email: firstname.lastname@example.org. Twitter: @lizweston.