45.9% spend more after they retire

A key factor in determining whether you can afford to retire is estimating how much you will spend in retirement. Experts say most will likely spend less because they have fewer overall expenses as a result of not working.

But, not everyone spends less.

In a recent study from the Employee Benefit Research Institute, nearly half of those studied ended up spending more. Those who did increase spending weren’t just the well off, but were represented across all income levels.

A few highlights from the study,

  • Median household spending dropped in the first few years after retirement. The reduction was 5.5% from pre-retirement levels for the first two years and 12.5% in the third and fourth years. After the fourth year, reductions in spending leveled out.
  • While the average amount of spending fell, a large percentage of households experienced increases in spending after retirement. 45.9% of those studied spent more in the first two years after retiring.
  • Those that spent more were not exclusively affluent households, but were distributed similarly across all levels. Of those who spent more, 28% spent 120% more than their pre-retirement level. After six years, 23.4% of households were still spending more.
  • In the first two years after retirement, transportation spending slowed the most. Median spending on transportation reduced by 25.1%.
  • Median of households in the study had mortgage payments before retirement, but no mortgage after retirement.

View the original study at here.

I have a theory that, unfortunately, a large number of people, once they gain access to their 401(k) savings in retirement, will not have sufficient experience with disciplining and budgeting their spending habits. As such, many will blow through their retirement nest eggs before they realize what they have done.

It is important to give serious thought to how much you will spend in retirement and how you plan to derive reliable and lasting income from your nest egg funds. Given increasing lengths of retirement, rising healthcare costs, volatility in the markets, and the general tendency of people to overspend, running out of money in retirement is probably easier than you think.

I wrote a report to help people solve these problems that includes: an easy method for estimating how much retirement income you may need, a list of ways to reduce expenses in retirement, and information on how to secure guaranteed income so that, regardless of what the future may hold, you will never run of money in retirement.

Download a free copy of the report at this link.

What are your thoughts?

  • Are you surprised to learn that so many people actually increase their spending during retirement?
  • Are you surprised that those who do aren’t just the well-to-do?
  • What do you think of my theory that many people will unwittingly exhaust their savings because they spend too much?
  • Did you know you could secure guaranteed income so that you will always have a “paycheck” during retirement?

Get more income for the same money

I have been doing some writing recently about “pooled income” – an idea that has existed in various forms for over 2,000 years – and how this resource may prove to be one of the biggest salvations for the Baby Boomer generation.

I looked up some numbers today to run a quick comparison between various alternatives for generating income at current rates – money market deposits, long term treasuries, and an immediate life annuity.

For this comparison, I assumed a male age 65 with $500,000 to allocate.

Here is how the numbers came out,

  • Money Market. Money market rates today (4-25-16 / www.bankrate.com) were paying between 0.85% and 1.00%. Assuming a 1% return on a $500,000 allocation, yields an income of $5,000/year.
  • 30 Year Treasury Bonds. The  yield on 30 Year U.S. Treasuries today (4-25-16 / data.cnbc.com) was hovering around 2.72%. Assuming a 2.72% return on a $500,000 allocation, yields an income of $13,610/year.
  • Immediate Life Annuity. I visited the CNN Money Retirement Calculator and ran a $500,000 lump sum for a 65 year old male for an immediate life annuity in my area. The result came back an estimated $2,744 per month for an income of $32,928/year.

Yearly income $500,000 allocation

These numbers change practically by the minute, but the general conclusion is clear. The annuity far exceeds the income generating capacity of the other alternatives for the same allocated amount.

Why does the annuity yield so much more income?

Because it is a pooled income product.

Pooled income is the primary engine behind entities as commonplace as Social Security and defined benefit pension plans.  People with 401(k) plans only and no company pension to fall back on can benefit tremendously from learning more about the benefits of pooled income products.

To learn more about how pooled income products work, click here.

Get back what’s missing from your 401(k)

People often speak nostalgically of the prosperous retirement era that our parents once had and how those days are long gone. But, what made our parents so lucky compared to today?

The major difference between then and now was that many of our parents had employer-sponsored “defined benefit” pension plans.

  • Defined benefit pensions offer employees a “defined” or specified benefit in the form of lifetime income upon retirement, say 70% of a worker’s final salary payable for life.
  • 401(k) plans, by contrast, are merely deferred savings accounts. They guarantee no future income and there is no second party promising any future benefits.
  • Defined benefit plans function using “pooled income.” Pooled income is a centuries old concept and one the most cost-effective ways to provide lifetime income to retired populations (learn more).
  • 401(k) plans make no use of pooled income. Instead, they presume people will amass enough wealth, generally through stock market investing, to live indefinitely off the earnings and appreciated value of their savings.

In comparison to what our parents had, the new retirement reality is a much more complicated and risky proposition – with more dependence on volatile markets, higher costs for management, greater personal uncertainty, and fewer guarantees.

But, it doesn’t have to be this way.

Get back what’s missing from your 401(k)

People can improve the outlook for their retirements by replacing what’s missing from the 401(k) retirement model. The key is gaining more access to pooled income.

There are many types of pooled income products available today that allow individuals to essentially create their own “private pensions.” In general, these products provide,

  • More retirement income per dollar allocated than other comparable options.
  • Guaranteed income for life and options for survivor benefits.
  • Protection against the risk of living too long and outliving retirement funds.
  • Insulation from the ups and downs in the market.
  • Simplified means of translating retirement savings into steady, reliable income.

Though the times have changed from the era of our parents, with greater access to pooled income options, the promise of a secure and enjoyable retirement remains within reach.

Click here to learn more about currently available pooled income options and see a simple way to calculate how much income you will need in retirement.

What do you think?

  • Did you ever wonder what happened to employer pension plans and why?
  • Does it surprise you to learn that pooled income can actually be less costly and more secure as a means of generating retirement income?
  • Did your parents or grandparents have pension plans that they benefitted from?

If you would like to discuss the suitability of income alternatives for your situation, you are welcome to contact me by email or through my Cincinnati, OH insurance agency, McCarthy Stevenot Agency, Inc.

How to generate income in retirement

Most people spend their careers saving and accumulating funds so that one day they can retire. But when retirement finally arrives, a whole new process begins.

Economists call it, “the decumulation phase.”

This is the process of turning saved or invested assets into regular income.

Decumulation is an entirely different animal than accumulation. Paying regular bills by slowly liquidating investment shares can be an extremely complicated task to undertake.

  • Which stock (or fund shares) should you sell first?
  • Should you sell shares of a stock that is up or a stock that is down?
  • Should you sell an average of all the stocks you own?
  • Should you be selling shares of some other investment such as a bond fund?

I often think of the challenges of decumulation when I am at the grocery store and see very senior people doing their shopping.

(OK…if that makes me some kind of economics/financial nerd, so be it. There is a serious human side to this story.)

I think to myself,

“Does this person now have to go home, log in to his or her online brokerage account, and sell shares to pay for those groceries?”

I also often wonder,

“What if this person is alone and has lost his or her spouse?”

What if the spouse who is now gone was the one who “took care” of the money?

What’s left is someone at a very delicate and vulnerable senior age – who is likely intimidated or even downright afraid – forced by necessity to manage an extremely complicated and difficult task, just to pay for basic things like groceries.

Yikes…

There is a better way.

There are products designed to generate and distribute income more smoothly. These products generally “pool” funds in order to distribute income steadily and predictably over time.

  • Funds of this general type date back to the Roman Empire when individuals were paid an annual stipend called an “annua.”
  • Roman soldiers received such stipends in exchange for military service.
  • Participants would make a single payment to the fund and receive payments each year until they died.
  • Other funds of this type – called tontines – were used during the middle ages by kings and lords to finance the cost of frequent military campaigns.
  • The first annuity used in America was established in Pennsylvania as a retirement fund for pastors in 1759.
  • Lotteries today use similar mechanisms to distribute prize money to winners. After an initial lump sum is contributed, funds are paid out evenly over a number of years.

Converting savings into income can be a very complicated process, but it doesn’t have to be.

After a certain age, for mercy’s sake, it really shouldn’t be.

Don’t leave your spouse trying to manage a “do-it-yourself” decumulation plan.

Learn how annuities can help convert savings into guaranteed, worry-free income and make the decumulation process a whole lot easier.

Try this simple method to calculate how much income you may need in retirement.

If you would like to contact me to discuss whether annuities may be suitable in your situation, I can be reached by email or through my Cincinnati, OH insurance agency, McCarthy Stevenot Agency, Inc., at 513-891-9888.

Why income beats savings in retirement

Imagine yourself far in the future. Yesterday, you celebrated your 82nd birthday! It was an enjoyable day spent with family and friends followed by a relaxing dinner with cake, ice cream, and many happy memories.

But this morning you awoke to some troubling news…

When you clicked on your favorite news app, you learned that an overnight far-eastern currency concern has sent U.S. markets into a tailspin.

As the next several days go by, market conditions rapidly deteriorate. The damage even begins to spread to other sectors. Both real estate and bonds start taking substantial hits.

Logging into your online brokerage account, you watch your account balances dropping more and more each day. Years and years of hard-earned savings are vanishing before your eyes.

You ask yourself, “Is this ever going to end? Should I be selling? Should I be staying put? Will my retirement funds be able to survive this latest ‘correction’? If not, how am I going to pay my future bills?”

This story is just a sample of the kind of worry that can arise when long-term retirement income is based solely on invested savings and systematic withdrawals from savings.

Do you currently have only a 401k plan and no guaranteed company pension?

Then, someday, this could be you…

The good news is, however, with a few simple planning steps, there are ways you can help reduce or even eliminate many of the above concerns. In fact, it can even be possible to establish a foundation for a reliable and worry-free retirement income.

The key to doing so is locking down enough guaranteed retirement income to cover your basic future expenses.

Guaranteed income is money that will be paid to you no matter what happens in future markets and no matter how long you end up living. Guaranteed income can be derived from a variety of sources including a combination of Social Security, a company or union pension, and life income annuities.

How much retirement income will you need?

Many planners point toward a “target” for retirement income that is equal to roughly 70% of a person’s pre-retirement income. In general, the more “base income” a person has from guaranteed sources, the easier time they will have meeting ongoing expenses in retirement. Studies show that individuals with more guaranteed income during retirement are also known to be happier and have less stress in their senior years.

How to create a successful retirement income plan

The fundamental elements of building a solid income plan for retirement are as follows;

  1. Reduce your long-term retirement living expenses where possible (downsize, simplify your life, pay off any mortgages or consumer debt).
  2. Establish an emergency fund for short-term cash needs (set aside the equivalent of six months to a year of income in an easily accessible FDIC-insured bank account).
  3. Calculate your NEEDED retirement income using the 70% rule or other similar method.
    (pre-retirement income = $100,000. 70% of $100,000 = $70,000)
  4. Add up ALL the income you will have from GUARANTEED sources such as Social Security, pensions, and life annuities.
    ($46,000 Social Security + $0 company pension + $0 annuity income = $46,000)
  5. Subtract your GUARANTEED income from your NEEDED income. This is your income “gap.” ($70,000 – $46,000 = $24,000 income gap)
  6. Click here to learn more about ways to fill your income gap!

Once funding for your basic income needs is set, you can think about allocating your remaining assets for future savings, special purchases, investments, and legacy planning (i.e. money that you plan to leave to kids, grandchildren, or charity).

For most people, covering basic retirement living expenses through guaranteed income will be better than relying on savings. Guaranteed income takes uncertainty out of affording your monthly bills and removes stress about what will happen to your savings in future markets. Guaranteed income also simplifies planning and assures you will receive a “check” each month no matter how long you our your spouse may live.

When added together, the benefits of guaranteed income help lead to a happier, more secure, and more relaxing retirement.

So, what about you? Do you worry about how to create income for your retirement? Do the potential ups and downs of the market bother you? If so, what is your plan to solve for this problem?

Let me know your thoughts by email or in the comments below.