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Many U.S. households retire without enough money to maintain their pre-retirement standard of living. Once retired, though, people often reduce their spending enough to make their money last, according to a recent study by David Blanchett, head of retirement research at Morningstar, /zigman2/quotes/209325896/composite MORN -0.63% and Warren Cormier, executive director of the Defined Contribution Institutional Investment Association’s Retirement Research Center.
“People are finding a way to make it work,” Blanchett says.
The findings challenge a common financial planning assumption that retirees’ spending will increase at the rate of inflation each year. But the research also indicates many people retire without a realistic understanding of how much they can safely spend.
Running out vs. running short
The fear of running out of money is pervasive in the U.S. Nearly half of Americans have this concern, according to the 2019 Aegon Retirement Readiness Survey. And their worries may be well-founded. A 2012 paper for the National Bureau of Economic Research found 46.1% of older adults died with less than $10,000 in financial assets.
Of course, the phrase “running out of money” is somewhat misleading. The vast majority of U.S. retirees receive Social Security benefits , which continue for life. So while they may run through their savings and run short of money, they can’t truly run out.
Still, few people relish the idea of having to cut back sharply on their spending in retirement or eking out an existence on $1,543 a month (the current average Social Security check).
Spending less slows the burn rate
Blanchett and Cormier studied 425 U.S. households that had at least $10,000 in savings at retirement and $5,000 in annual Social Security benefits. They found only 18% retired with enough money to maintain their standard of living.
Over time, though, most of the households reduced their spending and slowed how quickly they were burning through their savings. After 10 years, the proportion with sufficient funds to last their retirement shot up to 48%.
The research, which was published in September 2020, has its limitations. The sample size was relatively small, didn’t include the poorest households and examined only the first 10 years of retirement. Also, the researchers couldn’t tell whether people were cutting back by necessity or choice. Blanchett believes many haven’t thought enough about how much retirement will cost and are forced to adjust as their savings dwindle.
“Either they didn’t know how much they needed to save , or they just didn’t (save),” Blanchett says. “They get to retirement and they have to start making harder choices.”
Some who could spend more don’t
However, the researchers also found that many of the households that had enough money were spending as if they did not. In fact, 29% of the best-funded households actually had more wealth 10 years into retirement.