Why Retirees Are Spending More Than They Used To

From 2016 to 2019, retirement income-replacement needs rose to 92% from 80% for folks who were earning $70,000 a year pre-retirement, according to J.P. Morgan Asset Management research.

That number “has been creeping up steadily for [about a decade],” Katherine Roy, managing director and chief retirement strategist at J.P. Morgan Asset Management, tells ThinkAdvisor in an interview. “There’s not as large a drop-off [as there used to be] between pre-retirement spending and comparable lifestyle post-retirement. 

“It’s time to take a fresh look at actual spending behavior to understand that rise.” 

Though 2020 was an anomaly because of the coronavirus pandemic, Roy cites savings behavior last year as “proof” that households “can spend less on certain things.”

“It was a record savings year nationally” for both workers and retirees, she notes.

That savings could hypothetically be “redirected” toward saving for retirement, she argues.

At the other end of the spectrum, Roy serves up a suggestion for how “good savers/bad spenders” can be encouraged to spend more in retirement by opening a separate account that would “recreate their paycheck.” 

“The second account would act as their spending account,” she says. “Their investment income, RMDs, etc. would be periodically transferred to the spending account to ‘recreate’ a paycheck-like experience.  Another option is to take a fresh look at annuities for the pure benefit of the payment mechanism.

“Annuities have different flavors and fees, and all that has to be understood by the client.”

Roy, who started out at Merrill Lynch, has specialized in the retirement space for more than 20 years.

Citing other J.P. Morgan research from 2019, she notes that 42% of 401(k) plan participants still keep assets in their plan three years after they retire. 

Plan sponsors are at work on low-cost solutions, particularly annuities, to invest some of that money, she says.

Part of the interview focused on President Joe Biden’s tax plan. For example, Roy discussed potential tax consequences, depending on the proposal as passed and perhaps future changes to the tax code, of having a heavy concentration of tax-deferred assets in retirement.

ThinkAdvisor recently interviewed Roy, who was speaking from New York City, where she’s based. She talked about the importance of de-risking ahead of retirement but stressed that there’s an inadvisable time to do that.

Here are highlights of our conversation:

THINKADVISOR: What level of income replacement needs do retirees have in actuality? 

KATHERINE ROY: In 2019, we did a study of typical participants, making about $70,000 before they retire. It showed that their income replacement needs — to support their current lifestyle in retirement — had gone up by 12% since 2016, from 80% to 92%. It’s been creeping up steadily for [about a decade]. 

The number one question: Is inflation driving that? No. It’s all inflation-adjusted. And up till now we’ve had [relatively low] inflation.

So individuals aren’t spending significantly less after they retire?

It used to be that people would spend less in retirement because they’d paid off their mortgages, say, or their transportation costs had gone down.

But that trend, as we’re seeing in our research, has narrowed. There’s not as large a drop-off between that pre-retiree who’s making $70,000 and their comparable lifestyle post-retirement, which is part of what’s driving that 92%.

So it’s time to take a fresh look at people’s actual spending behaviors to understand that rise in spending. It’s [partly] inflation, but it’s also the choices that households seem to be making and have been making for the last decade or so.

How different was 2020 with regard to spending behavior?

Last year gave us a glimmer of hope, albeit in very challenging circumstances — an anomalous year due to COVID and market volatility in March.

We saw earners and retirees spending meaningfully less in 2020. It was a record savings year nationally. We saw steady earners spend between 2% and 5% less and retirees 5% to almost 9% less as households.

That presents some proof that there can be less spending by most households on certain things that, maybe, they didn’t miss that we could redirect toward savings in pre-retirement.

One of the most powerful levers that a retiree has is to spend less or to adapt their spending so that they’re not drawing on a portfolio that could be struggling, depending on what’s happening in the market.

Some retirees are just the opposite: They don’t spend much in retirement because they fear they’ll run out of money, correct? 

Yes. A good saver often has a very difficult time shifting to being a spender.

So I believe that for certain clients — those good savers/bad spenders — who are really nervous about spending their principal, recreate their paycheck by putting money into a separate account. That could result in their having greater confidence to spend down the money.

This is [better than frequently] checking their account balances. Retirees looking at their account balances can inhibit their spending even if they’ve been told through their planning and by their advisor that they have more than enough money. 

Your research found that folks still have assets in a 401(k) plans three years after retirement. What are the implications?

That has been pretty much a steady trend that we’ve seen over the last 10 years with people that have higher balances, and it’s picked up. We looked at participants in 401(k) plans and found that 42% have assets in the plan after three years. 

It used to be that about 20% had some sort of balance in their 401(k) plans after three years.

What could an incentive be to stay in the plan?

Plan sponsors are working through which retirement income solutions they plan to or will offer to participants who stay. The sponsors usually have lower-cost types of solutions, particularly in the annuity space.