The Saving Paradox: Why Most Retirees Secretly Struggle
Summary
TLDRIn 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
💡 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.
📊 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.
🌟 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.
Mindmap
Keywords
💡Retirement Planning
💡Savings Paradox
💡Spending Psychology
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
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