by Gary D. Halbert
January 3, 2017

  1. Over Two-Thirds of Americans Retire Too Early
  2. The Main Sources of Income in Retirement
  3. Most Retirees Spend Less Than They Can Afford
  4. How Retirees Can Avoid Under-Spending in Retirement
  5. Parting Thoughts: Happy New Year Again, Everyone


We all know that there is a savings crisis in America. According to the National Institute on Retirement Security (NIRS), the median savings balance of near-retirement households is only around $12,000, while the median saving balance for all working-age households is only around $3,000.

NIRS states that some 45%, or 38 million working-age households, have no retirement savings. Based on 401(k)-type accounts and IRA balances alone, NIRS says some 92% of working households do not meet conservative retirement savings targets for their age and income. Even when counting their entire net worth, 65% still fall short.

While saving trends have started to improve over the last couple of years, we’re still facing a huge shortfall, especially among Baby Boomers of all races who are retiring in droves. No one knows the solution to this dilemma. The obvious answer is that most Americans will need to work longer before they retire.

Yet just the opposite is happening. Americans are retiring earlier and earlier. Recent data show that over half of working Americans are retiring between the ages of 61 and 65, despite their lack of savings. This doesn’t make sense.

Even more surprising is another study which found that most retirees in recent years are spending even less each year than they can afford to in retirement. Here again, the reasons are not entirely clear. I’ll try to make sense of them as we go along today.

Over Two-Thirds of Americans Retire Too Early

You’ve heard the horror stories about many Americans retiring with puny nest eggs and little income to live on. Still, data show that more than two-thirds of Americans are out of the full-time workforce by age 66.

Over half of Americans quit working between the ages of 61 and 65, while 18% retire even earlier, according to the data shown below from the LIMRA Secure Retirement Institute. By age 75, almost 90% of Americans have left the labor force, LIMRA says, despite the savings crisis.

The retirement statistics no doubt include some people who can’t find work or who can’t work because of health problems. Still, early retirement usually means an income squeeze. So what gives?


Retirement Savings

Along with stopping work early, most Americans begin collecting Social Security before their full retirement age, which is 66 for many and rises to 67 for those born after 1960. That’s a bad idea since it reduces the total amount they’ll receive from the government over their lifetimes.

Fortunately, the percentage of those claiming Social Security early has declined in the last few years. That’s good news because monthly benefits rise by roughly 6.5% to 8% a year between ages 62 and 70. Still, in 2014, 57% of men and 64% of women took Social Security early.

Half of leading-edge Baby Boomers, those ages 61 to 69, have fully retired and about 15% of the total US population is now finished with work. Among this group, the presence of a traditional pension or retirement plan is often what separates those considered income-rich from those who are not, according to the latest LIMRA report.

The Main Sources of Income in Retirement

Retired Americans receive over $1.3 trillion in income annually. The vast majority of this income comes from two sources: Social Security (42%) and traditional pension and retirement plans (30%), with the remainder coming from other sources. The traditional pensions remain fairly common for those over 75, but are virtually nonexistent for those under 35, LIMRA found.

Some 41% of retirees have annual income of less than $25,000, and of those, only 21% receive income from a pension or retirement plan. Meanwhile, of retirees with income over $50,000 a year, about 80% draw from a pension or retirement plan.

To get a picture of how severe the retirement income crisis is — and why more Americans should consider working longer and delaying Social Security — LIMRA looked at total household savings.

US households own $31 trillion of investable assets. That’s an average of $253,200 per household. But most of that is owned by the wealthy. The median holding of investable assets is just $17,500, and three in four American households have saved less than $100,000.

Most Retirees Spend Less Than They Can Afford

Much of the advice on managing your finances in retirement focuses on controlling spending to ensure that assets last a lifetime. And that certainly makes sense, especially for people who are short on savings.

But many retirees face a different problem. They have sufficient resources to support themselves, but are so reluctant to draw on their nest egg that it continues to grow throughout retirement. In other words, they spend less than they can afford to in retirement.

That may be good for their heirs, but it can prevent them from enjoying their retirement life as much as they could. Here’s how to stop “spendaphobia” from undermining the retirement Americans have worked and saved so hard to attain.

Researchers including the American College of Financial Services chief academic officer Michael Finke found a “retirement consumption gap” when they examined retiree spending habits between 2000 and 2012 for a study published earlier this year.

Specifically, except for households of low to modest means, the retirees they tracked were spending less on average than the amount available to them from Social Security, pensions and income from retirement accounts. In the case of wealthy retirees, the researchers calculated that they were spending less than half the annual amount they could actually afford to spend.

Vanguard, one of the world’s largest investment companies, discovered a similar reluctance to spend when it surveyed retirees with at least $100,000 in financial assets. For example, when Vanguard looked at what it called “cornerstone accounts” — workplace savings plans, IRAs, brokerage and mutual fund accounts — it estimated that retirees spent only 60% of the money they withdrew, and reinvested the remaining 40% in other accounts.

There are any number of reasons that explain why many retirees are so hesitant to spend down their savings. The combination of longer lifespans and the inherent difficulty of estimating a sustainable withdrawal rate can make retirees overly cautious about spending for fear of outliving their assets.

Likewise, the threat of high medical expenses or a medical emergency late in life may also lead many people to be especially conservative about tapping their nest egg. And undoubtedly some retirees may limit spending because they wish to pass on a legacy to heirs.

But Finke believes there’s also a psychological or emotional factor that contributes to this aversion to spend. “A lot of retirees have formed a habit of thrift over the years. And they’ve developed a decision-making rule that you don’t spend more than your income,” he explains.

What they consider income can include interest, dividends and other distributions from investments, Finke says, but not the capital growth of their portfolios — which makes them reluctant to dip into principal.

Indeed, when Finke and another researcher asked retirees as part of a yet-to-be-published study whether they would feel uncomfortable spending down assets in order

1, 2  - View Full Page