Publisher's Perspective

Some years back a series of commercials from an investment company showed people living it up with luxury items such as fancy watches which, they reminded viewers, do the same thing cheap watches do: tell time.

The tag line was “How are you spending your retirement?” Meaning that unneeded spending now means less security later, and it’s better to invest instead (specifically through them).

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Projecting how much you’ll spend in retirement is a major part of retirement planning because that is central to the issue of when you’ll be financially able to retire, along with the related issues of projecting income.

For a federal retiree, the most predictable retirement income comes from annuities under CSRS or FERS and Social Security, and from other possible sources such as military retired pay or a spouse’s pension from private sector employment. Income from retirement savings in programs such as the Thrift Savings Plan also are in the mix. In all cases, the closer you are to retirement, the more accurate the income picture will be.

On the spending side, common wisdom holds that you’ll need about 70-80 percent of your pre-retirement income to maintain your standard of living in retirement, based on the notion that certain expenses will go down.

Achieving a target ratio of expected income to expected outgo is what all those studies of “retirement confidence” are all about.

Just be aware that this is not an exact science. A recent analysis by the Employee Benefit Research Institute, for example, said its own recent data and other research on spending in retirement shows that “savings regret — or sticker shock — among retirees is common: People wish they’d saved more as they face potential retirement costs that they hadn’t really considered previously, such as long-term care.”

It said that helps explain why for all retirement income groups, even the most affluent, many are so reluctant to use savings more than they had planned to make up for unexpected costs.

“Retirees across the board were generally loath to spend down their personal assets. Often, this preference to maintain the nest egg throughout retirement was associated with the uncertainties surrounding life and spending needs in retirement,” it said.

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One respondent to the survey “gave the example of her in-laws, who have enough retirement money to be comfortable but would rather eat ramen noodles than spend their assets.”

Similarly, a recent report by the Center for Retirement Research cites studies of retirees into why some retirees “barely draw down their financial assets during retirement. In fact, the evidence indicates that many retirees’ assets continue to grow well into retirement. This slow (or negative) drawdown is puzzling, since one of the main purposes of retirement savings in the lifecycle model is to provide consumption throughout old age.”

One potential reason, it said, relates to learning of potential expenses such as long-term care. Others include the related issue of “longevity risk”—living much longer than expected, making long-term care costs even more likely—and a desire to leave money to heirs.

This desire to preserve savings is clear in the behavior of TSP investors. Across all account holders, the large company stock C fund holds the largest percentage of assets (not counting its share of investments in the mixed lifecycle L funds), about 31 percent. The ultra-safe government securities G fund holds about 27 percent, again not counting L fund money invested in that fund.

However, among those 60-69—late-career employees and early retirement period retirees—the numbers are 38 percent G and 28 percent C. For those in their 70s and older, almost all retirees, they are 43 and 28.

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Is this a “problem?” Not necessarily. People are free to act according to their best judgment.

But the reports do suggest, for example, that since potential long-term care costs are among the biggest retirement spending worries, more people might consider insuring against those costs. They also stress the importance of understanding the value of income streams guaranteed for life such as Social Security and civil service annuities that act as a floor beneath which income won’t fall.

Confidence in how you’ll spend your retirement is not just about dollars in and dollars out, it’s also about peace of mind.

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