Most Retirees Spend Only a Fraction of Their Savings, and the Reason Is How the Money Feels

What 20 years of retiree data shows

If you're still working and most of your money sits in a 401k and index funds, you probably picture spending in retirement as living off that balance. The data says you mostly won't.

EBRI, a research group that studies retirement money, followed retirees for 20 years. Among those who started retirement with $500,000 or more, the median retiree had spent 11.8% of it by the end. Picture retiring with $800,000 and, two decades later, having spent about $94,000 of it. A third of everyone they tracked finished their first 18 years of retirement with more money than they started with.

The data comes from the Health and Retirement Study, where the University of Michigan has followed about 20,000 Americans over 50 since 1992. EBRI found something else in it. For the typical retiree, what they spent in a year came out about equal to what came in that year. The paycheck stopped, a different check started, and they lived on that one. The balance mostly sat there.

Checks get spent. Savings don't.

Two retirement researchers, David Blanchett and Michael Finke, went further. They took 2,500 households from the same study, all 55 or older with at least $100,000 saved, split each household's money by where it came from, and measured how much of each kind got spent once the household reached 65.

Social Security, pensions and annuities, the checks that show up every month for life, got spent at about 80%.

Savings were a different story. A 65-year-old couple took about 2% a year out of their savings and investment accounts. The 4% rule says that same couple could take 4% a year and have it last 30 years. So they spent roughly half of what their savings could have paid them.

Worth knowing: that research came out of an institute run by the Alliance for Lifetime Income, a group funded by annuity companies. The underlying data is public, though, and EBRI's work landed in the same place on its own.

Put it in your own numbers. Say you stop working with $1.2 million. The 4% rule says that can pay you $48,000 a year, about $4,000 a month. The couples in this study took half. Over 20 years, that's about $480,000 of spending that never happens.

Why careful savers hold back

So why would people who saved for 30 years not use the money? Only about a quarter of retirees say they're holding it back to leave behind. Late-life medical bills weren't big enough to explain it either. What's left is how each kind of money feels.

A pension check asks nothing of you. It lands, you pay the bills, there's no decision. It works like the paycheck you already know.

Pulling from a 401k is different. Every withdrawal is a decision to sell shares, and every decision drags the same questions behind it. How much is safe? Is the market down this month? What does this do to my taxes? How long am I going to live? Nobody can answer the last one, so the safe move always looks like taking a little less. The researchers make the same point: working out what to spend from savings is far harder than cashing a check, and that difficulty is part of why people spend less.

Then there's the balance itself. For 30 years you were rewarded every time that number went up. The first year it goes down on purpose, it feels like losing something you worked hard for.

I think there's a fair case for holding back, too. If you don't know whether you'll live to 75 or 95, spending less is a reasonable way to protect yourself. But a check that keeps coming as long as you're alive answers the lifespan question in a way a balance never can.

The evidence that it's the feeling

Some of the strongest evidence comes from the IRS. At a certain age, the government makes you start taking money out of your traditional IRA and 401k. Blanchett and Finke found people spend more from those accounts once that starts. Their read is that once money comes out on a schedule, people treat it more like a paycheck. If you were born in 1960 or later, that schedule doesn't start until 75.

EBRI saw it from the other side. After 18 years, pensioners' savings were down just 4%. For people without a pension, 34%. The pension paid the bills, so the savings never had to.

Blanchett and Finke found a matching pattern. Among couples aged 65 to 69 with $100,000 to $500,000 saved, the ones with $25,000 to $35,000 a year of lifetime income took 2.7% a year from savings. Couples with the same savings and more than $50,000 a year coming in took 6%. The lifetime checks gave them room to spend the savings too.

Rent, dividends and interest got spent at about half, close to savings and well below the 80% for pensions and Social Security. The researchers' guess is that this income doesn't feel steady. A dividend can get cut. Rent stops when a tenant leaves.

So if you're planning to stop working, the question is how much your money pays you each month and how steady that payment is. Framed that way, working three extra years to push $1.2 million to $1.5 million looks different. Going by this data, most of that extra money ends up in the account you leave behind.

Three things to do while you're still working

First, stop measuring retirement as a balance. Next to every account, write what it would pay you each month. A $600,000 401k at 4% is about $2,000 a month. A $300,000 brokerage account is another $1,000. Put that total next to what a month of your life costs. That's the number that tells you whether you can stop working.

I did this with one of my own rentals recently. It had about $100,000 of equity in it. After the bills, maintenance and repairs, it was paying me about $300 to $400 a month. As a balance, $100,000 sounds like a lot. As a paycheck, it was too little, especially for a house I had to manage myself.

Second, decide your paycheck before you need it. Pick an amount, pick a day of the month, and set up an automatic transfer from your investments to checking. The researchers point to this kind of setup too: savings that pay out automatically, so they look and act like income. You decide once, and after that the money just shows up. It's what the IRS ends up doing to retirees at 75, except you set it up yourself, on your terms, at the age you stop working.

Third, start moving part of your money into things that pay you on their own before the last paycheck arrives, while you can still add to them and get used to spending from them. Say your expenses run about $7,000 a month. If $3,000 already arrives on its own the day you stop working, the only money you have to make decisions about is the other $4,000.

Each option carries a trade-off. An annuity is the closest thing to a pension you can buy: a lump sum buys a set check every month for life, and on the basic version nothing is left to your heirs. Dividends leave the money in your hands, but the company sets the amount and can cut it. Rentals pay monthly, and they come with tenants, repairs and vacancies.