The Saving Paradox: Why Most Retirees Secretly Struggle

Summary

In this video, a certified financial planner explores the 'savings paradox', a psychological barrier preventing retirees from spending their wealth. Despite being financially prepared, many retirees struggle to transition from a saving to a spending mindset. The video discusses the impact of this paradox, where even affluent retirees often under-spend, and suggests that financial advice tends to reinforce fear rather than encouraging intentional spending. The speaker advocates for early retirement planning to understand spending possibilities and craft a retirement strategy that aligns with personal desires, not just out of fear.

Takeaways

• 💡 Transitioning into retirement can be challenging, especially when shifting from saving to spending psychology.
• 🧠 The 'savings paradox' or 'permission to spend problem' refers to retirees who struggle to spend their accumulated wealth, despite being financially prepared.
• 📈 Many affluent retirees fail to spend even their annual income, and those who do use a 4% withdrawal rate often end up with more wealth than they started with.
• 🔍 Retirees are more likely to increase their wealth 5 times than to spend their initial principal when using a 4% withdrawal rate over 30 years.
• ⏳ Retirees often don’t start spending down their wealth until their late 80s, after the typical life expectancy.
• 🛑 Deferring spending in early retirement doesn’t always lead to increased spending later, as aging limitations make it harder to enjoy wealth in later years.
• 😟 Fear and loss aversion can lead retirees to view spending their retirement savings as a risky activity, which can increase anxiety and limit spending.
• 🏦 Financial institutions may perpetuate the fear of spending through advice like the 4% rule or delaying Social Security, often to their own financial benefit.
• 🔄 A shift is needed in retirement income planning, moving from sustainable withdrawal rates to strategies that maximize spending while managing risks like lifespan uncertainty and healthcare costs.
• 🌟 Retirees need intentional financial planning to understand their true spending potential, reducing fear and helping them enjoy their wealth in alignment with their personal goals.

Q & A

What is the 'savings paradox' discussed in the video?

The 'savings paradox,' also called the 'permission to spend problem,' refers to the psychological challenge retirees face in transitioning from a lifetime of saving to spending their wealth in retirement. Despite being financially prepared, many retirees are hesitant to spend, often due to ingrained habits and fear of running out of money.

Why do affluent retirees struggle with spending their retirement savings?

Affluent retirees, defined as those with at least $333,000 in total wealth, struggle with spending because they have spent most of their lives accumulating wealth. This deeply ingrained saving mentality makes it difficult for them to shift to a spending mindset, even though they are financially secure.

What is the 4% withdrawal rate, and how does it relate to retirement spending?

The 4% withdrawal rate is a common guideline suggesting retirees can withdraw 4% of their portfolio annually without running out of money. However, the video highlights that retirees following this rate are more likely to end up with more money than they started with, rather than depleting their savings.

Why is it important to spend in early retirement, according to the video?

Spending in early retirement is important because delaying spending can lead to missed opportunities. As retirees age, they may face physical limitations that prevent them from enjoying activities they deferred. The video stresses that deferring spending often results in retirees never making up for the lost experiences.

What is the 'consumption gap' as described in the video?

The 'consumption gap' refers to the tendency of retirees to under-spend, even during challenging market periods. Despite economic downturns and poor market returns, retirees' financial assets often continue to grow instead of being spent, leaving them with more wealth than anticipated.

What psychological factors contribute to retirees not spending their savings?

Psychological factors like loss aversion, fear of making financial mistakes, and the mindset of preserving rather than decumulating wealth lead retirees to avoid spending their savings. Retirees often frame spending as a loss rather than seeing it as a reward for their years of saving.

How do financial advisors and institutions contribute to the fear of spending in retirement?

Financial advisors and institutions may inadvertently contribute to retirees' fears by promoting strategies like the 4% rule, delaying Social Security benefits, and emphasizing the risks of taxes and health care costs. These messages can reinforce the fear of running out of money, causing retirees to hesitate to spend.

What is the suggested approach to retirement planning mentioned in the video?

The video suggests starting retirement planning at least 5 years before retiring. This allows individuals to understand their financial situation, assess their true spending capacities, and develop an intentional strategy for retirement that aligns with their goals and desires.

How does fear of running out of money affect retirees' spending behavior?

Fear of running out of money leads many retirees to spend less than they could afford. This cautious approach is often based on gut feelings or intuition rather than sound financial planning, increasing anxiety and preventing retirees from fully enjoying their savings.

What is the ultimate goal of retirement planning according to the video?

The ultimate goal of retirement planning, as stated in the video, is to help retirees live their best lives by spending their wealth intentionally rather than out of fear. Whether this means leaving a legacy or enjoying more experiences, the key is to make informed, intentional decisions about how to use accumulated wealth.

Outlines

00:00

💡 The Savings Paradox Explained

The video script discusses the concept of the 'Savings Paradox', a psychological barrier that prevents retirees from spending their savings despite being financially prepared for retirement. The speaker, a certified financial planner, explains that the habits of saving and delaying gratification, which are beneficial during one's working years, can become detrimental in retirement. The paradox is described as a 'permission to spend problem', where retirees struggle to transition from a saving mindset to a spending mindset. The script references a study by Michael Kitces, which indicates that affluent retirees often do not spend down their retirement portfolios, and in many cases, their wealth grows significantly rather than diminishes. The study also points out that spending typically does not begin to deplete the principal until the retiree is well into their 80s, which is beyond the average life expectancy. The speaker emphasizes the importance of addressing this paradox to ensure a happy and stress-free retirement.

05:00

📊 The Reality of Retiree Spending

This section of the script delves into the reality of how retirees approach spending their savings. It highlights that many retirees, despite having adequate funds, are hesitant to spend down their assets due to fear and a preservation mindset. The study 'Spending in Retirement: Determining the Consumption Gap' is mentioned, which suggests that retirees often rely on intuition rather than long-term financial planning when making spending decisions. This can lead to increased anxiety and a defensive approach to spending, viewing the use of retirement funds as a loss rather than a fulfillment of saved intentions. The speaker critiques financial advice that promotes fear-based strategies to keep retirees from spending, such as the 4% rule or delaying Social Security benefits, arguing that these may not align with the retiree's best interests and can perpetuate the Savings Paradox. The section concludes by suggesting that retirement planning should focus on creating confidence in spending, rather than just sustainable withdrawal rates.

10:02

🌟 Crafting an Intentional Retirement Strategy

The final paragraph of the script emphasizes the importance of starting retirement planning well in advance, at least five years prior to retirement, to understand the true potential and limits of one's savings. The speaker encourages retirees to move away from fear-based decisions and towards intentional spending that aligns with their personal goals and desires. The video concludes with a call to action for viewers to visit the speaker's website to learn more about how to live their best life in retirement. The speaker hopes that by understanding their financial possibilities, retirees can make informed decisions about spending that will lead to greater satisfaction and enjoyment of their retirement years.

Keywords

💡Retirement Planning

Retirement planning refers to the process of preparing for financial stability and lifestyle changes after leaving the workforce. In the video, the speaker emphasizes the importance of planning at least five years before retirement, highlighting how proper financial preparation can allow retirees to live a stress-free and intentional retirement. It involves considering spending habits, savings, and possible investment strategies.

💡Savings Paradox

The 'Savings Paradox,' also referred to as the 'permission to spend problem,' is a psychological mindset where retirees, despite being financially prepared, struggle to spend their accumulated wealth. This paradox is the main focus of the video, with the speaker explaining that retirees spend their entire lives saving money but feel hesitant or fearful about using it during retirement, even when it's safe to do so.

💡Spending Psychology

Spending psychology refers to the mindset and behaviors people exhibit in relation to their spending habits, particularly during retirement, as highlighted in the video.

Highlights

Transitioning into retirement is difficult due to the shift from saving psychology to spending psychology.

The 'savings paradox' or 'permission to spend problem' is a psychological barrier that prevents retirees from spending their wealth.

Affluent retirees often fail to spend even their annual income in retirement, despite being financially prepared.

Using a 4% withdrawal rate, two-thirds of retirees end up with more than double their starting principal after 30 years.

Retirees are more likely to 5x their wealth than to dip into their initial principal using the 4% rule.

Retirees often only begin spending down their wealth in their late 80s, past the average life expectancy.

Many retirees limit spending in early retirement, but this can lead to an inability to spend later due to aging and health constraints.

Retirees’ feelings of inadequate preparation often shift their mindset from decumulation to preservation.

Loss aversion can lead retirees to view spending their assets as risky, framing it as a loss rather than fulfilling the purpose of their savings.

Financial institutions and advisors often promote the fear of spending by advocating conservative strategies like the 4% rule and delaying Social Security.

Effective management of uncertain risks, such as lifespan and medical costs, is more crucial than chasing high market returns in retirement.

Retirement income discussions should shift from sustainable withdrawal rates to maximizing spending while managing risks.

Retirees often don't know what they can safely spend, leading to missed opportunities for greater satisfaction in retirement.

Personal examples highlight that retirees could afford to enjoy life more, such as visiting family more frequently, if they understood their true financial capacity.

Planning retirement at least 5 years in advance helps individuals understand their financial tolerances and create intentional retirement strategies.

Transcripts

it's no surprise that transitioning into

retirement is extremely difficult in

today's video I'm going to illustrate

one of the Hidden ways retirees struggle

as a result of something that I call the

savings Paradox I'm a certified

financial planner and the owner of an

independent financial planning firm and

every year I spend hundreds of hours

helping my clients navigate the

difficulties of retirement planning to

achieve happy stress-free retirements

the reality of retirement can be very

very different from what many expect

part of this is a result the fact that

the routines and behaviors that support

us during our working life can actually

work against us once we enter retirement

the largest issue of all is tackling the

shift from saving psychology to spending

psychology So today we're going to break

down the savings Paradox which I like to

call the permission to spend problem and

discuss what you can do about it the

saving Paradox or permission to spend

problem is a psychological state of mind

that keeps well-prepared retirees from

spending their wealth in retirement

well-meaning and well prepared retirees

spend their entire life delaying

gratification and stalking away money in

order to prepare for retirement and then

suddenly retirement arrives at your

doorstep and you and Society give

yourselves every reason that you should

not or could not spend your wealth now

the best illustration of this problem

comes from a Michael kitus article

entitled why most retirees will never

draw down their retirement portfolio

we're going to review this study for a

second time today it was in another

recent video of mine but buried pretty

de deep in the video and after reviewing

it I'm going to teach you how to

identify if you are suffering from this

problem as well as what you can do to

solve it the article makes several key

points the first key point is affluent

retirees relying on their portfolios in

retirement are failing to spend even

their annual income in their retirement

years and the more affluent the worse

this trend gets now in this study

affluent is is defined as a retiree with

at least

$333,000 in total wealth including

housing the second key point from the

study 2third of retirees using a 4%

initial withdrawal rate end a 30-year

retirement with more than double their

starting principle let me repeat that if

you start with the 4% withdrawal rate

you end 2third of the time you end with

more than double your starting principle

now even more shocking is that you are

more likely end to end up with five

times your initial principal than you

are to even dip into principle if you

use a 4% withdraw rate just think about

that you're more likely to 5x your

wealth than you are to even touch your

original starting dollar amount if you

use a 4% withdrawal rate the third key

point from the study even in the

unlikeliest of cases where a retiree

does end up spending down their wealth

it doesn't typically occur until a

retiree is in their late 80s which is

well past the average life expectancy of

most Americans the fourth key point from

the study limiting spending in early

retirement does have a prophylactic or

defensive effect the issue with this is

that many retirees think they will make

up that spending later in retirement but

it's even harder to spend one's wealth

and later retirement due to the

limitations of aging and so most

retirees never recoup that quote unquote

deferral kitus goes on to state that as

a result of this permission to spend

problem which he calls the consumption

Gap from the beginning of 2000 to the

end of 2008 a very challenging time of

mediocre returns for retirement

portfolios when in theory account

balances would have dipped with ongoing

withdrawals the average Financial assets

of the median retirees still continued

to increase in retirement to illustrate

these points kitus reviews two scenarios

which I'm going to show on the screen

and quote directly from his article so

scenario one for instance imagine a

retiree who has a $1 million balanced

portfolio and wants to plan for a

30-year retirement inflation averages 3%

and the average returns of the balanced

portfolio are 8% over the 30-year period

now to make the money last for the

entire time Horizon the retiree would

start out by spending $61,000 in year

one of retirement so that's a 6.1%

withdrawal rate and then adjust each

subsequent year for inflation spending

down the retirement account balance by

the end of the 30th year as the chart on

the screen reveals though projected

spending that plans to spend down the

assets by the end of a 30-year

retirement still would spend less than

the growth in the retirement account for

the first 10 years and wouldn't actually

dip into the principle until the 17th

year out of 30 that's assuming modest 3%

inflation and long-term returns of 8%

which is the approximate average for the

past 100 years now let's look at a

second scenario in scenario 2 we take a

more conservative approach and a

gloomier Outlook and instead projected a

balanced portfolio to grow at only 7% as

you can see here on the screen inflation

at 4% which would be high and so the

spending in year one initially starts at

$49,000 which is 4.9% initial withdrawal

rate we have the same million doll

portfolio invested in a balanced

portfolio the portfolio value would peak

in year 11 and you wouldn't dip into

principle until year 18 now the reason

this is important is in the context of

this more conservative scenario a

65-year-old retiree's life expectancy is

only to their mid 880s which means that

a significant number of retirees who use

this as their plan spending strategy

will actually pass away before they ever

materially dip into retirement principle

at all so clearly the challenge in

retirement is balancing early retirement

spending without adding undo risk to the

back portion of retirement now to be

clear it is perfectly okay to have a

goal of spending less and early

retirement in order to have more

stability at the end of retirement or so

that you can intentionally leave a

legacy to airs ultimately the study that

underlies the kitus article the study is

titled spending in retirement

determining the consumption Gap makes

some additional interesting points the

first feelings of inadequate preparation

May shift retirees mindsets from

decumulation to preservation meaning

that feelings of fear may keep someone

from spending their assets and focusing

too much attention on preserving their

assets the study found that rather than

depending on long-term financial

planning retirees are myopic and overly

rely on their intuition or their gut

when adjusting consumption and

investment strategies and this

situational approach to post-retirement

consumption can increase retirees

vulnerability to loss aversion you know

translated into English that just means

that going based on one's gut or

intuition actually leads to lower levels

of confidence and increased anxiety in

retirement now the study continues when

loss aversion is present or fear of loss

is present retirees May frame spending

down their portfolio as a risky

proposition and view the conversion of

funds from Financial assets to fund

current spending as a loss meaning they

think of spending out of their

retirement savings as a loss rather than

as an activity that was intentionally

saved for now retirees plagued with this

fear of loss may spend less as a defense

mechanism to protect against making a

perceived Financial mistake so

ultimately what I believe is underlying

all of this is the fact that brokerage

companies mutual funds index funds and

financial advisers all over the country

know and understand that retirees

behaviors are influenced by these fears

and therefore because these brokerage

companies mutual funds index funds and

financial advisers have a financial

incentive to convince retirees that if

they spend their money they will be at

risk of running out they promote the

following types of material the 4% rule

for instance or even that Social

Security at 70 delaying Social Security

is always the best strategy or that

taxes are always bad when in fact taxes

are simply the cost of extracting wealth

and if planned appropriately for they're

just simply another expense that can be

planned for for or even something like

don't retire before 65 because health

insurance before Medicare is too

expensive and prohibitive or live on

pennies so that you can obtain Health

Care subsidies even if your retirement

portfolio could both afford to pay you

well and pay for Private health

insurance Prem Medicare now some of

those activities May in fact be valuable

and even the right thing to do in a

particular scenario they're just not

universally right and the only Universal

purpose those things serve is to benefit

Financial actors who annuitize fees

while your assets grow at your expense

and the retirement consumption Gap study

finally concludes with after retirement

the reward of efficient market returns

from effective management of Market risk

that was dominant during accumulation

meaning the reward of searching for

higher market returns while you're

savings while you're in the saving phase

I'm sorry may be less important than

stable reliable income from effective

management of risks related to uncertain

lifespan and medical costs and these

actions may increase the confidence of a

client and lead to spending patterns

more consistent with the goals that

motivated your savings behaviors

remember you saved in order to have

funds for funding your retirement and if

we save and then don't spend it we

actually aren't acting consistently with

our initial goals now retirement income

conversations may need to move away from

conversations around sustainable

withdrawal rates and towards strategies

that maximize spending for a given level

of financial assets while addressing

concerns about uncertainties a shift of

this nature would ensure that clients

receive the highest possible

satisfaction from their accumulated

wealth and that comes again from the

consumption Gap study now ultimately you

can see that the permission to spend

problem is in fact real retirees aren't

spending down their assets and it's not

because they can't it's because they are

afraid to so through my work I found

that most retirees don't clearly know

what they can spend and therefore never

consider what they might spend their

wealth on if they knew that they could

spend more and therefore they never

evaluate how much extra satisfaction

they might get from those extra

activities ities because they never

allowed themselves to consider because

they couldn't imagine World in which

they could actually fund those

activities let me give you an example

imagine you live on the west coast and

your kids and grandkids live on the east

coast all your life while you have been

saving you can only afford to go visit

one time per year because that's what

fit within your budget so when you

retire you assume that you can only go

one time per year you actually just

don't know any different but what if you

found out through Good Financial

Planning that your retirement assets

could support five visits per year and

that it wouldn't hinder your retirement

in any way would you then consider going

more often now I don't know the answer

to that and I'm not trying to supply

anyone to answer to that that's simply a

personal choice but my belief is

wouldn't you rather know that you have

the option and aren't putting your

retirement at risk as a result of that

option rather than simply not knowing at

all and so I'll conclude this video by

making the same case I do at the end of

all my videos start retirement planning

at least 5 years before retiring in that

way you can learn the true possibilities

and tolerances of your savings and

saving behaviors and therefore you can

craft the truly intentional retirement

Strat strategy that will allow you to

live the best life possible for your

specific unique desires and if that

includes spending very little while

alive in order to leave a huge Legacy

for your kids or an endowment for a

university you care about or whatever by

all means go ahead and do so my hope for

you is simply that you will do it out of

intentionality rather than out of fear

and with that said if you'd like to

learn more about how we support our

clients living their best life in

retirement you can visit our website at

www.the peak.com and thank you as always

for your time and attention and I'll see

you in the next video