Retirees increasingly depend on defined contribution accounts for income, but tend to underspend from those accounts, according to a report released this week by Morningstar. Retirees can find it difficult to figure out how much money to withdraw each year to use as income, the research found
Morningstar examined how retirees decide how much to spend from their retirement accounts each year. The study found that retirees tend to pick simple, hands-off strategies — withdrawing based on required minimum distributions, expected expenses, dividend/interest income or advisor consultation — and to stick with them.
Although helpful starting points, such approaches can lead to suboptimal lifetime spending. This suggests retirees may need help with spending down their retirement savings.
For its study, Morningstar surveyed a global sample of 937 retired or semiretired people, of whom, 670 reported having a DC retirement plan and were retained as the study's core sample. Data came from 262 Americans, 208 Britons and 200 Australians.
To be eligible for the study, retirees had to be at least 60 years old and have at least the median level of investable assets in their country — for the American cohort, $100,000. Most participants were white, 58% reported a bachelor's or higher degree, 52% were female, and 48% were male.
Simple Approaches
The survey found that half of retirees used only simple strategies when making withdrawal decisions. Fifty-three percent reported that they use only one strategy. Of these, 26% based their withdrawal on their RMD.
A third of participants reported that they were currently working with an advisor, and more than half said they depended on a combination of the simple strategies to determine their spending withdrawal rate.
Morningstar said it is likely their advisors follow a more advanced strategy to determine an adequate spending level, but based on their responses, many of these clients seemed unable to identify what these other strategies might be, suggesting they lean toward a more hands-off approach to working with their advisor.
This is all right, Morningstar said, as long as investors have enough confidence in their advisor to fully spend the income they withdraw. However, existing research and anecdotal evidence from advisors suggest retirees continue to struggle to spend down their savings.
The survey further found that 98% of retirees had no intention of changing their approach. Of those who did intend to change, many said their plan would change once they came into money or if the need arose.
Goal Setting
Morningstar said it can be hard to pinpoint why retirees tend to opt for simple strategies to determine how much to spend. Why do they choose simple strategies when it may mean spending less than they possibly could?
The researchers posit that retirees don't put more effort into defining their withdrawal rate because they don't see a reason to do so. Survey respondents expressed confidence that they could continue to pay their expected expenses in the long run.
They may not see a reason to spend more and introduce the risk of running out of money. Indeed, two-thirds of Americans fear running out of money in retirement, according to other research. As such, a conservative approach may seem ideal as it helps allay this fear, Morningstar said.
Morningstar says many retirees do not feel motivated to engage in more complex retirement decision-making, as they may not see the point of "optimizing" their spending decisions when they can maintain their existing lifestyles without fear of running out of money just by using simple strategies.
This suggests that retirees may benefit from reconnecting with and reimagining their goals. In these conversations with advisors, retirees may benefit from frameworks that push them to consider their life values and how best to align their spending to uphold these values.
Morningstar cites the example of the PERMA-V model, a framework from the field of positive psychology that posits well-being has several components: positive emotion, engagement, relationships, meaning, accomplishment and vitality.
Morningstar's previous research has found that using this framework during goal-setting can encourage investors to think about goals in a novel way and dig deeper into how their money can align with what they value most.
During goal setting, retirees can use the model as a framework to consider how existing or new goals can satisfy these components. These deeper goals may motivate them to try harder to define a withdrawal rate and enjoy their income in retirement precisely because they are anchored in retirees' values.
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