Dwindling Retirement Funds? Maybe Not

Conventional wisdom is that leaving employment and drawing from retirement savings could be a recipe to eventual and inevitable penury. But a recent study begs to differ.

In “Spending in Retirement…or Not?” the BlackRock Retirement Institute (BRI) and the Employee Benefit Research Institute (EBRI) challenge the popular conception that retirement is only a time of spending and that large numbers of retirees are endangered financially due to having left the workforce. Bruce Wolfe and Robert Brazier, respectively BRI’s Executive Director and Director, note that BRI and EBRI found that apparently sensible and reasonable expectation is a rather pat assumption.

Wolfe and Brazier note that the financial industry and academics “have always assumed” that retirees would draw from their retirement savings in a way that would maintain the standard of living they had while they were working. “With concerns that retirement savings for individuals may be dangerously low, the fear has been that withdrawals for such smoothing could leave retirees running out of funds well short of their passing away,” they write.

But the study, Wolfe and Brazier write, found that on the average, regardless of how wealthy the retirees were and almost 20 years after they left the workforce, the majority of current retirees still have 80% of what they saved for retirement. They write that this “husbanding” of funds may be attributable to a number of factors:

  • beneficial changes to Social Security and Medicare;
  • a relatively high percentage of jobs that offered pensions;
  • strong real estate appreciation; and
  • an investment market that generally delivered strong returns and high interest rates.

They add that it is also possible that retirees are controlling how much they spend into order to leave bequests and donations to charity, or to reserve funds to cover possible health care expenses and to make sure they don’t outlive their savings.

Another important factor, the research found, is that the retirement assets of many retirees grew due to the way they were invested. “Surprisingly, over one third of households across each wealth group had more assets after 17-to-18 years in retirement than initially,” write Wolfe and Brazier.

Still, the study did find that some retirees were spending down their assets. “For the lowest wealth group, there was approximately an equal set of retirees with less than 20% of assets as those with over 100% of initial assets,” Wolfe and Brazier note. They add that “while most — particularly the two wealthiest segments— are doing well enough to grow or minimally dip into savings principal, a smaller group across the wealth spectrum are spending down.” Why? Wolfe and Brazier suggest that “this spending down could represent a steadier drawdown consistent with systematic decumulation of assets. For others this spending down may have been unplanned and ad-hoc after suffering one, or more, financial shocks or unexpected expenses, ranging from a death of a spouse, divorce, home repair, family or medical emergency.”

Crystal Ball

Wolfe and Brazier take a look at the future and what it portends for future retirees, and whether they will be able to have as stable and well-provided post-employment life. They argue that changing demographics and the possibility that the stock market could be more challenging “will only elevate the complexity and importance of helping retirees maximize the value of retirement savings.” Future retirees, they say, “will face obstacles not seen by prior generations and many of the apparent behavioral biases possibly holding back current retirees from spending will be at play among future retirees as well. Whether they can gain the confidence to spend retirement assets if and when needed — or not and potentially see major adjustments to their lifestyle instead — remains to be seen.”

But Wolfe and Brazier find room for optimism, and say that “with improved savings behavior, steady and consistent investing, and sound guidance on retirement income, future retirees can take the steps necessary towards a comfortable standard of living.” They add that defined contribution plans also can provide future retirees with guidance and provide a means for both accumulation and decumulation.

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