Do you have retirement savings? If so, are you still saving or have you begun spending?
Perhaps you have enough savings to have a nice retirement. Maybe you don’t spend a lot of money because you want to give money to your children.
According to the Federal Reserve Bulletin in 2018, nearly 10,000 Baby Boomers retire every day, and approximately 18% of the country will be 65 or older by 2020.
This high number of people at retirement age results in more U.S. household wealth being distributed to retirees, making the issue of spending retirement savings important for the nearly, partially and fully retired.
People are not spending the way they are supposed to. Economic theory says that to maximize happiness you should spend all the money that you have throughout your retirement.
However, in reality, people do not spend down their assets in retirement. Instead, some retirees over 70 are increasing their wealth.
What influences people’s financial behaviors around saving and spending decisions?
Research shows that investors’ spending decisions involve complex economic decision-making
and are influenced by a number of factors such as gender, income, education, life expectancies, bequest motives, cognitive ability, health status and household size, etc. For example, women generally live longer than men; therefore, they spend down their assets slower as compared to males.
How much should you spend? The rule of thumb is to withdraw 4% of your nest egg’s value annually. This doesn’t mean you’re going to spend down your assets or that you will leave assets, if that is your plan.
The 4% rule is a general rule and is not specific to your purpose and your retirement. When confronted with difficult decisions, we prefer simplified rules of thumb.
Because we don’t know how long we are going to live, we prefer conservative spending as we are afraid of running out of money for retirement.
Death and financial decision-making
We know on some level that we are going to die, but many of us are reluctant or even avoid talking about any death-related topic because we subconsciously fear death. This is especially true in my Chinese culture. This is known as “avoidance.”
While avoidance is one option, others focus on their plan to leave something for people they love or leave a lasting impact on something outside of themselves, like their favorite charity, church or their family.
This is known as “symbolic immortality,” and includes legacy planning – deciding what you want leave behind, such as stories, jewelry, journal, pictures, memories or money.
Thoughts about death stimulate people to allocate money toward savings as opposed to spending.
Studies also show that people who experienced reminders of death chose lower spending rates. Saving money can be more effective than spending money to soothe the fear of death because money provides protection against death anxiety, a sense of security and satisfaction by leaving legacies that will improve other people’s lives.
However, keeping savings instead of spending your assets accordingly may prevent you from enjoying the type of retirement you envisioned.
To thine own self be true
People might change the way they live if they think more honestly about their mortality.
Because we don’t like to think or talk about death, we often fail to plan for things that are most important to us. Instead of planning for the future, we don’t plan at all.
But if you cannot avoid death “avoidance,” such as not considering retirement vehicles like an annuity (as an annuity is a reminder of death), you might not be matching your true intentions with your actions.
Knowing yourself and deciding what you really want for retirement, your family and your legacy affects your financial decisions, and this affects your happiness. With a better knowledge of yourself, you can match your intentions with your actions and achieve your financial goals.
So, take time to think about death, and you might have a better financial life.
YI LIUis a graduate instructor in the Department of Personal Financial Planning at Texas Tech.