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THE DRUMBEAT OF “retirement crisis” is much too loud. While 54% of retirees believe there’s a national retirement crisis, just 4% describe their own retirement situation as a crisis. And whereas 90% of recent retirees are able to spend freely, within reason, or can cover their needs and also engage in some discretionary spending, only 10% say that they’re on a strict budget.
Concern about running out of money is regularly exaggerated by inflated estimates of life expectancy. Social Security tables indicate that, on average, only one in 10 of today’s 65-year-old men will live to age 95. Moreover, older people spend less, in large part because physical limitations make them less able to spend and because they’re less inclined to spend for personal reasons.
Spending at age 84, adjusted for inflation, is 23% less than it was at age 62 among college-educated American couples. Spending on movies, theatre, opera and concerts declines by more than 50% between the ages of 60 and 80. Spending on hearing aids, nursing homes and funeral expenses increases by more than 50%.
We need not feel guilty about spending our hard-earned savings on ourselves. I wrote an article for TheWall Street Journal on the subject, prompting one reader to comment: “During my career I was a very conscientious saver and investor. I always maxed out my 401(k) contribution and put a large percentage of my salary and bonus into a deferred compensation program. I have had a difficult time changing my mindset from a saver to a spender. This article helped me make that mental transition. The first thing I did was to go out and get fitted for a new set of PING golf clubs and I didn’t feel guilty about it!”
Some people derive no pleasure from spending on themselves. Another reader wrote: “If one has never derived pleasure from material things, why would that change in retirement? A cup of coffee and a walk on the beach at dawn and I’m happy. The psychic income from being over-saved has value.”
I empathize with this reader. I, too, like a cup of coffee and a walk on the beach, even if not at dawn. But why not share “over-saved” money with family and the needy? One reader who has embraced this lesson wrote: “I learned from my mom that the greatest joy in life is giving to your family. She would give something to all her six children, their spouses, the grandchildren, the great-grandchildren, and all their spouses on their birthdays, anniversaries, St. Patrick’s Day, Valentine’s Day, and no reason at all. If you want the closest thing to eternal life, try this.”
Another wrote about balancing spending on himself, his family and the needy: “I am deriving pleasure from assuming the strategy of ‘I am through saving. Now I am spending.’ Judiciously, to be sure, but nevertheless with a view to obtaining satisfaction. Thus, my wife and I have made some long-desired renovations to our home, plan to schedule at least two major overseas vacations a year, supplement our children’s financial needs at a time when they need it and when I can see the result. I devote more time and financial support to charitable work. I continue to spend time exercising at a local athletic club, now free thanks to Silver Sneakers. I read more, and indulge in my love of classical music. All of this gives me significant satisfaction.”
My wife and I have rebalanced our spending on ourselves, our family and the needy over the years. We have contributed a substantial amount toward the purchase of a house by our younger daughter, we bought a house for our disabled older daughter, and we’ve contributed much to the needy and to support the causes that matter to us.
One important rebalancing point occurred in late 2016, when United Airlines failed to upgrade us from economy to business class on either leg of a long trip from California to Israel. It dawned on us that we’re sufficiently old and sufficiently well-off to afford business class on long trips, and this is what we have done ever since. And we have increased substantially our contributions to the needy and to support the causes that matter to us.
One reader faulted me for failing to “address preserving capital for the next generation, which is a priority for some of us octogenarians.” But why not give money to the next generation with a warm hand rather than with a cold one?
I end with a story about the so-called dangers of giving adult children money without asking them to pay it back, a danger emphasized by some financial advisors who approached me after a conference presentation on the subject. One advisor stood aside, waiting until all the others had left.
“I burst out crying when you said, ‘It is better to give with a warm hand than with a cold one’.” Indeed, she had tears in her eyes when she spoke to me. It turned out that she lent her son some $27,000 for college tuition and now demanded that he pay her by the agreed schedule. She reasoned that paying by schedule would benefit her son, teaching him financial responsibility.
But the son was now financially squeezed, at the beginning of his career, lacking even money to buy his girlfriend an engagement ring, and his mother’s demand soured their relationship. The mother had more than enough to forgive the loan without imposing any hardship on her, giving with a warm hand rather than with a cold one. I hope this is what she did that day. And I hope that she shares her story and lessons with her clients.
Meir Statman is a finance professor at Santa Clara University and a leading expert on behavioral finance. His books include Finance for Normal People and What Investors Really Want.
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One factor that I haven’t seen mentioned as of this writing is the Long Term Care expense boogeyman. I agree with “giving with a warm hand” — particularly to young adults, when the given money has a lot of positive leverage, but I think affluent retirees must keep a lot of the nest egg growing for possible Long Term Care expenses, which can be substantial.
Well, sir, I like it. Your financial situation is your own, and managing it appropriately is your challenge. These seem like good things to keep in mind. Personally, I find it difficult to imagine that the best time to give my children money is in their 60s, which is perhaps the most likely possibility for the time when both their parents will be gone.
I too have lived the “conscientious” life, and for some time have discussed retirement savings with a conscientious young colleague.
A while back he said something that made me laugh. It amounted to, ” ‘Distributions? Eek!”
I could recall having similar feelings, and shared with him the concept that ended them: “Don’t forget about the ‘denominator’.”
IOW, the numerator is how much one has saved, and the denominator is how many years it must last. My colleague’s “denominator” is likely more than 50 years; mine when I retire at 68 is unlikely to exceed 20 years.
IOW, easy-peasy. 🙂
This topic could be titled, “Several hundred people and an elephant” (instead of “Six blind men and elephant.”) We all unavoidably come at it from our own perspective. I know people who lived what you would call a miserly life but thoroughly enjoyed themselves. I also know people with a lot of money who spent a lot of money and weren’t really happy. It’s a mixed bag.
I am glad that someone who contributes to Humble Dollar is an optimist. Most of the comments so far are definitely pessimistic.
I handle requests for personal loans by framing it in my mind as gift. The requestor always refers to it as a loan and often indicates when it will be paid back and sometimes even offers interest. But I do not set any terms. If the money is returned to me it, or if it never is, I do not let it affect the relationship, and I never mention it again. The caveat is that I do not loan what I cannot afford as a gift.
Even if you’re determined not to let a loan affect a relationship, it may well be damaged anyway. It’s not all about you. We live in a time where people wax on like romantic poets about the value of relationships, yet talk about them as if they were vastly simpler than they are in real life.
And do you think the ability to do that is remotely reflective of the average older American?
Whenever we’ve forgiven loans made to friends or family we’ve asked them to “pay it forward” when they can.
Must be nice to be so well off, equipped with rose-colored glasses, and unworried by inflation. I find this article so over-the-top optimistic as to be delusional. I am a single woman in my mid 70s, even the SSA thinks I’m good for another 14 years, and most longevity calculators, taking more data into account, give me considerably longer. I had a fee-for-service financial analyst run the numbers for me recently. With 2% inflation I’m fine, with 5% inflation I’m in trouble and will need to activate Plan B. My pension has no COLA, and I suspect that the cost of living adjustments on my SS will not keep pace with my health care costs, which are already around $10,000/year (and that’s not counting a $3,000 contribution from my former employer).
If I actually die still in possession of assets, they will go to nephews and nieces and to a lesser extent to charities, but I see no sensible reason to speed up the process when I may well need the money myself.
Mr. Statman, what do you mean when you state, “United Airlines failed to upgrade us from economy to business class on either leg of a long trip from California to Israel.”?
I get what Meir is saying. Admittedly I have no grasp on statistics, but I know about behavioral and how it’s the prime influencer in everything from saving to spending to relationships, etc. Somewhere between over confidence and fear mongering is the right path. These days I place little stock in what the experts and the news tell me about the world. The stories are skewed toward a feeling that the world is going to hell in a hand basket. Sure lots is wrong but lots is right and you won’t hear much about that in the media and commentary.
What we have in this thread I believe is a debate about quantity versus quality. Sure extreme poverty sucks, but mostly it’s your inner life that makes or breaks the world you live in. I get that investing and spending are about quantity, but if you haven’t dealt with your fears, biases and blockages, and paid attention to nutrition and exercise, all the quantity in creation won’t make up for it. And for me that’s what’s most important in these later years, regardless of all the expert bantering about numbers and stats. So I say kudos to Meir Statman for focusing on the importance of heart.
This article is based on a Vanguard survey of investors who had to have a minimum of $50,000 in investable assets. Are we really supposed to believe that this group is representative of all retirees?
It serves as panic porn for financial advisors, so if it isn’t true they’d invent it.
First world issues here – pay for biz class instead of waiting for an upgrade earned by other travel? Buy a disabled kid a house free and clear? Sure, generosity and grace from the super-prosperous is to be encouraged. But I agree with Richard Quinn below. This is not the circumstance of the typical American retiree. Nor is it representative of the typical reader of this website, I suspect.
I value Prof. Statman’s published scholarly work a great deal. This article reads much more like a HumbleBrag than a practical piece of HumbleDollar advice.
What does the phrase “running out of money is regularly exaggerated by inflated estimates of life expectancy” mean here, are you saying these statistics are incorrect? That’s an odd assertion to make with no supporting evidence. Or if you’re implying people shouldn’t plan to a 1 in 10 chance of running out of money, then you should realize that a 10% chance of something happening doesn’t mean it won’t happen, it means it definitely will happen, 10% of the time on average. Sure, if your personal sample size is one, it may seem unlikely; but imagine if all advisors, representing a population of say 1 million clients, were all using 50% rather than 10%. About half of their clients, or 500,000 people on average, would end up broke. Even planning for a 10% chance is 100,000 failures, which seems too high to me. Imagine boarding an airplane where the pilot announced there was “only” a 10% chance there isn’t enough fuel for the trip. I’ve heard actuaries say even a 5% chance of going broke is a bit high if you understand the statistics. I would recommend considering the actual implications of the statistics, rather than just hand waiving them away.
It’s a jump to say that for a group of retirees that have been provided a 50% success rate, half of them would go broke. That would be true only if they made zero adjustments, such as minor cuts to their spending. I would recommend reviewing the below article. It supports the general premise of this HD post, in that all of the talk around a “retirement crisis” is overblown. Perhaps this concern is valid for retirees as a whole, considering those who have saved nothing for retirement and rely on SS alone, but for retirees that have made even a modest effort to plan for the future, I would agree that concerns about them running out of money are overblown.
I don’t think there are a lot of retirees sitting under a bridge, warming their hands over a tin can fire thinking, “if only I would have went with a 3% safe withdrawal rate.”
https://www.kitces.com/blog/monte-carlo-retirement-projection-probability-success-adjustment-minimum-odds/
Wow, this is a great topic. But the answers must take into consideration that the economic status of all retired people in the US spans from folks worth many millions of dollars to others who are on the dole. The health of older folks spans a similar spectrum, as does the age that we will die at. They are so many unknowns.
A hundred thousand dollars is not what it once was. Our government could double our taxes overnight. The world is a shaky place in the best of times and Ameirca is very far away from the best of times right now.
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I think people of modest means must continue to save and be careful with any spending so they have some chance of being solvent until called to their eternal reward.
I get your point, but I think it has limited applicability in the real world. You stats don’t seem to square with reality- I take surveys with a grain of salt.
I’m 78 and have entered the give some money to the children and grandchildren mode, but I’m not typical. I live on a pension, not investments and my SS is the maximum benefit.
My view would be very different if I was withdrawing from assets with all its variables and unknowns, especially if those assets had to last over two lifetimes.
There sure is a lot of complaining from retirees and their advocates if 90% can spend freely and cover their needs.
The median net worth for those 65 plus is about $260,000. I can’t see how drawing from that plus SS allows free spending.
Social Security benefits represent about 30% of the income of the elderly. Among elderly Social Security beneficiaries, 37% of men and 42% of women receive 50% or more of their income from Social Security. Among elderly Social Security beneficiaries, 12% of men and 15% of women rely on Social Security for 90% or more of their income.
I’m a believer in trying to anticipate the what ifs of life – financially conservative if you will. You never know. I’m not talking about denying ones self to not spend money, but the fear of running out of money is valid and real for many retirees – if they have the money.
Last year my former employer took away our health benefits and gave us a HRA to buy our own coverage. That started shifting costs to retirees. The worse part was the change in Rx coverage. Many retirees suddenly faced monthly costs of several hundred dollars a month, even more than a thousand in some cases. That took a big chunk of their income. Not all older people spend less.
What you suggest may be fine for the more affluent among us, but I think painting a rosy picture does a disservice to the bulk of average retirees
Thanks, great article and consistent with decades of experience with tens of thousands of workers and retirees. One of the few areas where wealth and health (and well being) really do intersect. In retirement planning, I’ve regularly counselled “without good health, nothing else much matters.” And today, perhaps more than ever, “good health” includes physical, mental and social well being. I’ve always advocated that “warm” hand giving should commence long before retirement. That is, life is not a dress rehearsal for retirement.
I suggest one reason to give with a cold hand is that by doing so one can cover unexpected expenses in old age, rather than being a burden on others while warm. On death, family and the needy can still get their money. Probably more money.
Now in my 70s, I realize, increasingly, that whatever Major Mishaps may hit America or the world over the next 30 or so years, if I lack adequate resources, I won’t be able to physically adjust. That is, my wife and I used to posit getting matching McDonald’s jobs in retirement, just to see if we could manage to make those wages/benefits work for us. “Work for us” using our lifetime of prudent financial techniques. What we now realize is that we couldn’t handle a McDonald’s job (nor many others that involve bodies—such as sitting at a desk all day). Sure, our adult kids (in the 40s!) could step in, if needed, and likely would. But rather than tilt probabilities toward that possibility, we approach remaining life as being overdue for Hyperinflation or another Great Depression. However low odds are for any U.S. Super Event such as those, why make it a “gamble”? Our last parents each died recently, in their 90s, and left us a nice sums of money, for which we have no need. Now, there’s a “generation-skipping” opportunity that lets us use the “warm-hand giving” philosophy, while putting our own future at no real risk. And the adult kids seem so far to appreciate the largesse passed through to them from their late and beloved grandparents.
(($; -)}™
My take is that the “Boomers” are just fine, but what about future retirees?
When I was first introduced to the concept of SS some 65 years ago during my first job, at $1 hour. I distinctly remember the business owner who hired me bemoaning the “financial cliff” aspect, and that the money would not be there for either of us when we retired.
🙂
Let me revise my first point to read ” “Boomers” and those who came before them are just fine…”
Excellent post, Meir.
A major influence is AUM – Assets Under Management — the income driver of the vast majority of financial advisors. A retiree spending their own money conflicts with this business model.
Running-out-of-money is the perfect “weapon”, sowing the the fear needed, to maximize their income & lifestyle — not ours.
A great read. Yes, so much better to give with a warm hand.