Michael Finke, dean of the American College of Financial Services and director of Texas Tech University’s department of personal financial planning, has some lessons for financial advisors working with clients on their retirement plans that might surprise them.
Although many people fear they will run out of money in retirement, the reality is that a large number of them don’t spend as much as they should if they want to enjoy their golden years, according to Finke.
“People aren’t spending enough in retirement,” said Finke, who spoke at this week’s CFA Institute Wealth Management conference in Minneapolis, a presentation that was also webcast. “They’re missing out on how they could have lived in retirement.” He suggested that advisors develop strategies “that allow retirees to get the most out” of retirement.
According to a Texas Tech Retirement Planning and Living Survey retirees scrimp on spending in retirement because they don’t know how much they can spend and still live comfortably (40%) and they worry they won’t be able to live a desirable lifestyle (43%). Only 11% cared about leaving a large bequest.
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Slightly more than half were uncomfortable if the balance in their investment portfolios fell during retirement. About three-quarters said certainty about their income was more important than the performance of their portfolio.
The result that their median spending is about 45% of their gross income. Overall spending in retirement declines over time, according to Finke. In the first year retirees tend to spend as much as they did the year before retirement, but as they age they spend less. Retirees are less active as they get older and many also worry about health care costs, said Finke.