Save this content for laterSave this content on your device for later, even while offline Sign in with FacebookSign in with your Facebook account Close

Make this a 2018 resolution: Spend more money

By: Bloomberg News
December 30, 2017 Updated: December 30, 2017 at 12:01 pm
0

With so much advice out there about saving money, being encouraged to spend could sound a little weird. But that's what some financial services firms are telling retirees to do - to make a New Year's resolution to use more of those dollars they've been socking away.

With about 10,000 baby boomers turning 65 every day, more attention is being paid to "decumulation" strategies - systematically drawing down all that money you've saved over the years. In theory, that should be a pleasant prospect. In reality, it's hard to flip a mental switch after decades of sacrifice. Moreover, spending more money when less is coming in can be pretty stressful.

"When we speak about spending resolutions, we usually speak about how to encourage people to spend less," said Meir Statman, a behavioral finance professor at Santa Clara University. "This is right for most young people. But with many older people, the problem is too little spending because of a reluctance to dip into capital."

A good chunk of retired Americans are financially situated to live it up a bit more. Research by the Employee Benefit Research Institute and BlackRock Retirement Institute found that, on average, a significant portion of retirees at all levels of wealth weren't spending down much of their nonhousing assets even well into retirement. A sample of 9,760 retiree households found that 18 years into retirement, many households still had 80 percent of their assets. (The research measured median nonhousing assets, such as IRAs, and taxable savings and investment accounts.) There was even an increase in assets for many retirees through age 85.

The attached chart tracks the assets of retiree households in three different wealth categories, from just before retirement to about 18 years later. It shows that even the lower wealth groups held on to a good portion of their assets - the medium wealth group ended up with 77 percent of what it started with while the lowest wealth group retained 80 percent.

These baby boomers have a lot of cash to throw around. But Generation X and millennials won't be so lucky by the time they hit 65. Boomers have defined benefit pension plans and they've profited from long-term real estate appreciation. They've also enjoyed a long period of above-average market returns. The increasing likelihood of Social Security and Medicare cuts, however, may force future generations to use more of their savings just to get by.

"People have never been taught how to spend money," said Nick Nefouse, head of the defined contribution strategy team at BlackRock.

Many 401(k) plans that allow retirees to park their assets don't even allow monthly withdrawals. Some have withdrawal fees. To get more flexibility, a retiree may need to roll a 401(k) into an IRA - which can mean losing access to institutional share classes for funds, which are much cheaper than many products sold to retail investors.

Retirees loath to spend are forced to take required minimum distributions (RMDs) at age 701/2. The amount withdrawn is based on their 401(k) balance, divided by a life expectancy factor set by the IRS. Rather than take a big distribution at the end of the year, retirees who can afford it (and whose plan allows it) should transfer their RMDs from 401(k)s into checking or money market accounts on a monthly basis - to be spent, Statman suggests. For people with donor-advised funds, he recommends automatic monthly or annual transfers from the fund to charities.

In other words, flip from auto-saving to auto-spending. Done smartly, it could make your life much more pleasant.

Register to the Colorado Springs Gazette
Incognito Mode Your browser is in Incognito mode

You vanished!

We welcome you to read all of our stories by signing into your account. If you don't have a subscription, please subscribe today for daily award winning journalism.

Register to the Colorado Springs Gazette
Subscribe to the Colorado Springs Gazette

It appears that you value local journalism. Thank you.

Subscribe today for unlimited digital access with 50% fewer ads for a faster browsing experience.

Already a Subscriber? LOGIN HERE

Wake up with today's top stories in your inbox

Wake up with today's top stories in your inbox

or
Already a print subscriber?
Already a digital subscriber?
 
This is your last FREE article for the month
This is your last FREE article for the month

Subscribe now and enjoy Unlimited Digital Access to Gazette.com

Only 99 cents for Unlimited Digital Access for 1 month
Then $2.31/week, billed monthly, cancel anytime
Already a print subscriber?
Already a digital subscriber?

 
You have reached your article limit for the month
You have reached your article limit for the month

We hope that you've enjoyed your complimentary access to Gazette.com

Only 99 cents for Unlimited Digital Access for 1 month
Then $2.31/week, billed monthly, cancel anytime
Already a print subscriber?
Already a digital subscriber?

 
articles remaining
×
Thank you for your interest in local journalism.
Gain unlimited access, 50% fewer ads and a faster browsing experience.