Retirees spend twice as much when they have guaranteed income, research finds
Guaranteed income sources like Social Security, pension assets, and annuities give people a “license” to spend more in retirement, new research found.
The amount of extra discretionary spending is significant, as those with assets in those categories spend about twice as much as those whose savings are in investments, according to the paper, “Guaranteed Income: A License to Spend,” published by an annuity industry group.
The reason is that people think about guaranteed income sources differently than savings. A survey that was part of the research found that nearly 60 percent of respondents said they would feel more comfortable spending on nonessentials if the money came from an extra $10,000 of income rather than a lump sum of $140,000, which is the equivalent cost of an income annuity.
“This is probably the most important reason to consider allocating more savings to lifetime income,” said David Blanchett, an author of the report and head of retirement research for PGIM DC Solutions. “Having more of your wealth that is protected or guaranteed for life will lead to an environment where someone is more likely to enjoy their savings, versus one big pot of money.”
A factor that makes spending from savings difficult is fear of the unknown – and something almost no one knows is how long they’re going to live, the authors noted.
“It’s really hard to know how much you can spend from a portfolio. We don’t know what the markets are going to do in the future and how long you’re going to live,” Blanchett said. “It’s difficult behaviorally to spend money from savings.”
The consequences of that can be important for the satisfaction many people have in retirement, as only about a quarter have explicit intentions to leave bequests,
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