How the Greatest Fear Impacts Retirees

Casual (and terrible) golfers such as myself often miss makeable putts. Even when the putt goes in, it is considered bad form if the putt “dies at the hole.” That’s a putt that, with just one less revolution, would have been left short. Professional golfers almost always aim to have the putt go a few feet past the hole if it doesn’t fall in, on the logically correct theory that a putt that never gets to the hole doesn’t even give itself a chance to go in.

I thought about this (daydreaming of golf?) while reading a fascinating new column by popular financial blogger Michael Kitces. The column isn’t about golf, but it does raise some really interesting points about the terrifying possibility of retirees running out of money long before they die, and why so few retirees ever come even close to doing so.

Kitces, linking to a related study, notes:

“In a recent study entitled ‘Spending In Retirement: Determining The Consumption Gap’ by Browning, Guo, Cheng, and Finke in the Journal of Financial Planning, researchers showed that affluent retirees relying on their portfolios in retirement are failing to even spend their annual income in their retirement years (and the more affluent they are, the worse the trend tends to be). In fact, not only are retirees not fully spending their available income, but their spending actually begins to decline in retirement. As a result, from the beginning of 2000 to the end of 2008 — a very challenging time of mediocre returns for retirement portfolios, when in theory account balances would have dipped with ongoing withdrawals – the average financial assets of wealthy retirees still continued to increase in retirement. Thus, the researchers identified a ‘consumption gap’ between what spending the retirement portfolios could support, and the lesser amount that was actually getting spent (which in turn left room for the portfolios to continue to grow).”

Positives and Negatives

We might think of the optimal result for a retiree as spending her last dollar on the day of her death—hopefully doing something that brings her joy, perhaps buying a gift for a great-grandchild. The likelihood of that happening, of course, is effectively zero. And it’s a sobering thought that our “optimal result” immediately becomes a terrifying result if our retiree lives one more day, just like our hypothetical putt that dies at the hole. It’s encouraging, then, that retirees continue to seek income and keep their expenses down, thus ensuring that a longer life won’t be a destitute one.

But there’s a concern in this trend, too; namely, that retirees, having worked their adult life and prepared well for their sunset years, now deprive themselves of some material things—be they good and services, travel, or gifts to charities or family members—to prolong their income well beyond what they’ll actually need. It’s not that the money will go to waste, of course, as they can be directed to charities or family members through wills and trusts, but rather that the freedom to use that money at their discretion is what the retiree may have lost.

There are no easy answers. It may be that, in a wide range of possible outcomes, the one most often taking place is the least damaging. My point, simply, is that we shouldn’t ignore that there is a downside to that approach as well. Perhaps it cannot be avoided, but it’s there nonetheless.

We’ll return to this idea in a future column.