Recent research on the psychology of spending reveals a new perspective in the psychology of retirement income satisfaction. Studies comparing the levels of satisfaction among retirees with different levels of guaranteed retirement income found those with higher levels of guarantees were more satisfied than those with less. What is rather surprising, however, was the revelation that a retiree’s income satisfaction does not have a linear relationship with the amount of wealth he or she has saved for retirement.
This article by The American College of Financial Services dives into this important client topic. Renowned retirement planning researcher Dr. Michael Finke, CFP®, The College’s Chief Academic Officer, offered his insights into the data, including tips for advisors to help clients get optimal enjoyment and fulfillment from their retirement years.
Retirement Income Satisfaction
The Case for a Mental Separation of Wealth and Income
Dr. Finke highlighted that an important distinction exists between wealth and income: People have trouble spending their assets, not spending their income. “Once we start viewing money as wealth, as a stock of money and not necessarily as a flow, then we seem to get less happiness out of spending it than we do from money that’s automatically turned into a flow,” Dr. Finke said.
In fact, data shows an inflection point when individuals have somewhere between $3 million and $4 million saved. Finke explained that people will naturally focus on a number — for example, $500,000 saved by the day they retire — and become negatively affected when that number decreases, even if it does not decrease until years after retirement.
What can advisors do to help dissuade their clients’ anxiety about spending down assets during retirement? One tip is for advisors to help clients reframe their retirement income perspective to focus more on the “income” aspect and less on the amount of money saved.