Shifting Gears From Saving to Spending in Retirement

Retirees, it's time to start thinking about long-term care costs, reinvestment and even giving your money away.

Hey, retirees, live a little, why don't you?

Retirement is often described as the “decumulation” phase—a period when retirees are steadily spending down their assets. But many retirees are not only leaving their nest eggs intact but also squirreling away a big chunk of their income—accumulating assets as they move through retirement, recent studies show.

It’s not just the wealthiest retirees who fall into this category. Retired households with at least $100,000 in financial assets save 31% of their income, on average, according to a recent study by fund giant Vanguard. About one-third of Americans 65 and older took no retirement income from their nest eggs during the past five years, according to a 2015 survey by financial-research firm Hearts & Wallets.

Looking at retirees from the middle of the wealth spectrum on up, “people are not spending down the way we would expect,” says Michael Finke, dean and chief academic officer at The American College, in Bryn Mawr, Pa. “And the question becomes, why did you save it in the first place?”

Saving money, of course, is a good thing. Perhaps your thrifty habits are what allowed you to enter retirement on a secure footing. But if you’re denying yourself some basic comforts because you’re afraid of living to 108, encountering massive medical expenses or failing to leave an inheritance for your children, it may be time to reassess the severity of those risks and how you’re managing them.

If you’re living life to the fullest but still spending less than your income, you have another set of issues to consider. You’ll want to minimize taxes as you continue to accumulate wealth throughout retirement, reinvest extra income in a way that fits your goals, and give away assets to charity or family members.

Saving is playing a growing role in retirees’ financial plans as defined-benefit pension plans disappear and retirees rely more on nonguaranteed sources of income, such as 401(k)s and IRAs, to cover expenses. Retirees who draw their income largely from investment accounts tend to save more than those relying on guaranteed-income sources, Vanguard found, as a result of the greater uncertainty involved with generating income from portfolios full of stocks and bonds.

And for many retirees, saving is simply hardwired. “I was born during the Great Depression,” says Henry “Bud” Hebeler, 83, a retired Boeing executive who now runs the retirement-planning website “I used to darn my own socks.” In focus groups, Hearts & Wallets found that older investors held negative views of other retirees who spend down their assets, while extolling the virtues of those who hardly spend at all. “It was not subtle,” says Laura Varas, the firm’s chief executive officer. “There was condemnation on one hand and admiration” on the other.

Get real about retirement costs. If you’re stuffing money under the mattress, first consider how much retirement is really costing you, and whether you’re saving up for future expenses that may never materialize.

Most retirement-planning tools assume that your spending will increase by the rate of inflation each year of retirement. But research suggests that approach may overestimate retirement costs. In inflation-adjusted terms, spending actually decreases 1% annually in retirement, according to research by David Blanchett, head of retirement research at investment-research firm Morningstar. Major expenses, such as a mortgage or kids’ college tuition, may disappear during retirement, and you’ll likely spend less on big-ticket vacations and other active pursuits as you age.

That means the amount you must withdraw from your portfolio to cover expenses may not only not increase, but could decrease significantly during retirement, says Jonathan Guyton, principal at Cornerstone Wealth Advisors, in Edina, Minn. He offers this example: Let’s say you’re spending about $75,000 annually in your first years of retirement. Social Security provides $40,000, and $35,000 comes from your investments. Twenty years down the road, if your spending follows the pattern found in Blanchett’s research, you’re likely to spend only about $60,000, adjusted for inflation. Social Security still provides an inflation-adjusted $40,000—so now your investments need to cover only $20,000, not $35,000.

Many retirees may also overestimate their spending needs because they’re taking an optimistic view of their life expectancy. Retirees overestimate their chances of surviving at least another 10 years by as much as 10 percentage points, according to researchers at the Federal Reserve Bank of Cleveland, University of St. Andrews and Brandeis University. A detailed calculator, such as the one at, will factor in your health, family history and lifestyle to give you a better sense of your life expectancy.

Rather than follow a rigid spending plan—drawing a fixed, inflation-adjusted dollar amount from your portfolio each year—consider a more dynamic strategy that responds to changes in your portfolio performance and life expectancy. One simple approach: Each year, divide one by your remaining life expectancy to arrive at your annual withdrawal rate. Studies have shown that this approach, which is basically the same method used by the IRS to calculate required minimum distributions from traditional IRAs, is more efficient than rigid spending rules.

Get comfortable with spending. As you reassess your withdrawals from year to year, you might find that you can safely spend more—perhaps much more. In a recent study, The American College’s Finke found that the wealthiest 20% of retirees could safely draw down as much as 50% more than what they’re spending.

We’re not suggesting that you blow the kids’ inheritance in Vegas. But if fears of a market downturn, long-term-care expenses or outliving your life expectancy are causing you to crimp your lifestyle, consider some strategies for taming those risks.

Long-term-care costs are one of the biggest risks retirees face. Check the cost of care in your area at Determine how much you can set aside from your savings, Social Security or other income to cover those costs, then consider a long-term-care insurance policy to fill in the gaps.

A deferred-income annuity can also help cover long-term care or other late-life expenses. You invest a lump sum in your fifties or sixties and get a guaranteed income stream that starts 10 or 20 years in the future. “Having that insurance ahead of time can make you feel more comfortable about spending down your assets during the early part of retirement,” Finke says.

If it’s the stock market that’s keeping you up at night, a “bucket” strategy may help. Keep five years’ worth of living expenses in the safest vehicles, such as high-yield savings accounts, certificates of deposit and short-term bonds. The next five years of living expenses can go into slightly riskier assets, such as high-quality intermediate-term bonds, and money designated for year 11 and beyond can go to a broadly diversified, stock-heavy portfolio. This approach can help you ignore short-term market swings because you know your next few years’ worth of spending are covered.

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For retirees who have trouble spending on anything that’s not essential, Guyton suggests this approach: Put money you need to cover basic retirement expenses, such as housing and taxes, in one account, and keep money earmarked for vacations and other frills in a separate account. A retiree with $1 million who needs about $40,000 to cover basic expenses, for example, might keep $800,000 in his core portfolio and $200,000 in his discretionary bucket, he says. Follow your safe withdrawal strategy religiously in your core account, while giving yourself more flexibility to spend the discretionary bucket however you like.

“Sometimes when people don’t know where the lines are—the boundaries of safety or security—they don’t want to step too far, so they don’t step very far at all,” Guyton says. “If I show you where the line is and say, ‘Don’t go over the line,’ you can walk confidently toward that line.”

Reinvest wisely. Some retirees find that they simply have more guaranteed income than they can spend. In early retirement, Carol Smith and her husband, Larry, enjoyed a waterfront home, a 36-foot sailboat and a motor home. “We had the world’s best time,” says Smith of Springdale, Ark. But they always lived on Social Security benefits and a disability payment from the Department of Veterans Affairs, leaving their investments untouched. And since her husband passed away last year, Smith has found she’s spending even less. Dining-out expenses, for example, dropped from $400 or $500 a month to $50 a month. With plenty of guaranteed income left over each month, Smith says she plans to leave an inheritance to her son and grandchildren. “My crazy days are over,” she says. She lets cash build up and periodically sweeps it over to a portfolio of bonds.

Many retirees, like Smith, are playing it safe with the income they’re stashing away. Two-thirds of all retirement income saved (including unneeded Social Security, pension, annuity and investment income) goes into bank accounts, certificates of deposit and other ultra-safe assets, according to Vanguard’s research. That may be because retirees anticipate needing that money in the near future—or it may be simple inertia, says Anna Madamba, a research analyst with Vanguard Center for Retirement Research and co-author of the study. Perhaps you planned to reinvest last year’s RMD but never got around to it. The money sits in your bank account, earning nothing.

Consider segmenting your savings so that you can match your investment strategy to your goal. Money that you’ll need in the next year or so can stay in cash. But money that you envision leaving to your grandson could be invested in a stock-heavy portfolio that matches his time horizon—not yours.

If you’re reinvesting in a taxable account, keep taxes in mind. Consider tax-efficient, low-fee index funds or municipal bonds for tax-free income.

If you or your spouse has some earned income, you can also invest unneeded income in a Roth IRA, which allows your money to grow tax-free and doesn’t require minimum distributions.

Even if you’re not eligible to contribute to a Roth, you can convert some of your traditional IRA money to a Roth. You’ll owe income tax on deductible contributions and earnings that are converted, so spreading the conversion over time can help you avoid a big one-time tax hit. By reducing your traditional IRA balance, you’ll reduce future RMDs from that account.

Give it away. Hebeler, who lives just outside Seattle, is concerned that his estate could be hit with federal as well as Washington State estate taxes. So each year, he compares how much he can afford to spend, based on updated assumptions about his life expectancy and investment returns, with how much he actually needs for living expenses. He gives away the difference.

With smart gifting strategies, you’ll not only help out charities or family members but also reap some tax benefits. Scour your taxable accounts for appreciated stock that you’ve held for more than a year. By giving those shares to charity, you’ll get a charitable deduction for the full market value and avoid paying capital-gains tax on the sale of the stock.

Hebeler likes to put highly appreciated stock in his two donor-advised funds. In such funds, you get an immediate charitable deduction for contributions, the money is invested and grows tax-free, and you can recommend how the assets should be distributed to specific charities over time.

For retirees with excess income, RMDs are a particular sore point. If you’re dealing with unneeded RMDs, consider a qualified charitable distribution: You can transfer up to $100,000 from your IRA directly to charity and have it count as your required distribution.

To help out family members, you could contribute to a Roth IRA on behalf of a child or grandchild—provided the child earned at least enough from a job during the year to equal the contribution, says Jeff Levine, chief retirement strategist at Ed Slott and Co. You can also pay a child’s college tuition directly to the school, or medical expenses directly to the health care provider, without affecting your $14,000 annual gift-tax exclusion for that person, says David Cutner, an elder-law attorney in New York. “A couple hundred thousand could be taken out of the estate to pay for a child’s education,” he says.

It may also make sense to give highly appreciated stock to children who are in low tax brackets. They could sell the stock and pay little or no tax, says James Ciprich, a financial planner at RegentAtlantic, in Morristown, N.J.

Rather than making gifts now, some retirees are more focused on leaving specific dollar amounts to their heirs—but that can cause them to keep such a tight lid on spending that they sacrifice the comfortable retirement they’ve earned. Diane Pearson, wealth adviser at Legend Financial Advisors in Pittsburgh, works with a client who is determined to leave his son $5 million—which is all the money he currently has. Instead of buying a house on the beach, as he had once planned, he’s staying in his $125,000 house and “living such a stringent lifestyle that it’s painful to watch,” Pearson says. “He won’t spend any money.”

If you have a definite bequest goal, consider a life insurance policy that will pay your heirs that amount, Levine says. “It provides a guarantee,” he says, “and allows you the flexibility to spend the rest of your money without the concern that you won’t accomplish that goal.”

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