awealthofcommonsense.com Open in urlscan Pro
151.101.194.159  Public Scan

Form analysis
3 forms found in the DOM

POST

<form id="mc4wp-form-1" class="mc4wp-form mc4wp-form-24225" method="post" data-id="24225" data-name="Get Some Common Sense">
  <div class="mc4wp-form-fields">Sign up for my newsletter: <p>
      <label>Email address: </label>
      <input type="email" name="EMAIL" placeholder="Your email address" required="">
      <input type="submit" value="Register">
    </p>
  </div><label style="display: none !important;">Leave this field empty if you're human: <input type="text" name="_mc4wp_honeypot" value="" tabindex="-1" autocomplete="off"></label><input type="hidden" name="_mc4wp_timestamp"
    value="1651841460"><input type="hidden" name="_mc4wp_form_id" value="24225"><input type="hidden" name="_mc4wp_form_element_id" value="mc4wp-form-1">
  <div class="mc4wp-response"></div>
</form>

GET https://awealthofcommonsense.com/

<form role="search" method="get" id="searchform" action="https://awealthofcommonsense.com/">
  <input type="text" value="" name="s" id="s" placeholder="Search">
  <input type="submit" id="searchsubmit" value="Search">
</form>

GET https://awealthofcommonsense.com

<form action="https://awealthofcommonsense.com" method="get"><label class="screen-reader-text" for="cat">Categories</label><select name="cat" id="cat" class="postform">
    <option value="-1">Select Category</option>
    <option class="level-0" value="28">Active Management</option>
    <option class="level-0" value="39">Alternatives/PE/Hedge Funds</option>
    <option class="level-0" value="29">Asset Allocation</option>
    <option class="level-0" value="23">Bear Markets/Crash</option>
    <option class="level-0" value="19">Behavioral Finance/Psychology</option>
    <option class="level-0" value="26">Bonds/Interest Rates</option>
    <option class="level-0" value="24">Bull Markets/Rally</option>
    <option class="level-0" value="31">Career/Lifestyle Advice</option>
    <option class="level-0" value="25">Company Specific</option>
    <option class="level-0" value="32">Crypto/Gold</option>
    <option class="level-0" value="20">Current Markets</option>
    <option class="level-0" value="30">Factor Investing</option>
    <option class="level-0" value="34">Links</option>
    <option class="level-0" value="33">Macro/Econ</option>
    <option class="level-0" value="22">Market History</option>
    <option class="level-0" value="37">Personal Finance</option>
    <option class="level-0" value="36">Self Promotion</option>
    <option class="level-0" value="1">Uncategorized</option>
    <option class="level-0" value="27">Wealth Management/Industry News</option>
  </select>
</form>

Text Content

A Wealth of Common Sense

 * Home
 * About
 * Invest with Ben
 * My Books
 * Animal Spirits
 * Contact




WHY IT’S SO HARD TO SPEND MONEY IN RETIREMENT

Posted April 15, 2022 by Ben Carlson

There are many different definitions of risk in the world of finance.

Risk could be defined as the permanent loss of capital, volatility, uncertainty,
drawdowns, underperforming a benchmark, missing out on opportunities, making a
big mistake at the wrong time, not knowing what you’re doing and more.

For most normal people the most realistic risk is not achieving your goals.

But the true risk for many people is longevity — the risk that you run out of
money before you die. This is the biggest risk in retirement for the majority of
the population.

When you consider how ill-prepared most Americans are when it comes to
retirement savings, it’s surprising more people don’t blow through their entire
nest egg when they stop working.

In fact, the opposite is the problem for many people — they don’t spend enough
in retirement.

The Employee Benefit Research Institute performed a study in 2018 looking at the
spending habits of retirees during their first two decades of retirement (or
less if they didn’t make it that long).

Here are the results:

 * People with less than $200k in assets (not including their house) spent down
   around 25% of their savings in the first 18 years of retirement.
 * Individuals with between $200k and $500k heading into retirement spent a
   little more than 27% of their money.
 * Retirees with $500k or more at retirement spent less than 12% of their nest
   egg within the first 20 years of retirement (on a median basis).
 * People with a pension spent the least from their portfolio with assets down
   an average of just 4% (versus a 34% decline for non-pensioners).
 * The median household in this study simply spent the income from their
   portfolio and avoided taking from the principal portfolio balance.

These were median numbers so there were obviously some people who did spend most
or all of their savings but one-third of retirees were found to have even
more money than they started with.

This seems counterintuitive but makes sense if you’re earning higher returns
than your withdrawal rate.

One conclusion we can draw from these studies is many retirees simply can’t
force themselves to spend down their portfolios, even those with the financial
wherewithal to do so. In fact, the EBRI research showed the group with the
highest level of assets had the lowest spending rates.

From a spreadsheet perspective, this makes no sense. It seems like many retirees
are depriving themselves from their own wealth.

But from a psychological perspective this makes all the sense in the world.

No one lives in a Monte Carlo simulation where you get 10,000 chances at picking
the path with the highest probability of success. The 4% rule sounds good in
theory but reality rarely cooperates when you have a plan with zero deviations.

As Mark Watney says in The Martian, “They say no plan survives first contact
with implementation.”

We all only get one chance when it comes to saving and then drawing down our
retirement assets.

For most people there’s a little voice in the back of their heads telling them,
“Sure, it worked out for most people in the past but what if the future is
different? What if I retire at the worst possible time?”

I totally understand this sentiment. It can be a scary proposition to leave the
working world behind and be forced to cover the majority of your expenses from
your life savings.

You have to budget for your basic cost of living, travel, healthcare, inflation,
taxes and any unexpected expenses. Plus there’s the added bonus of having no
idea what future returns in the markets will look like.

It’s not easy.

This is why it’s so important to have a financial plan that takes into account
the inherent uncertainty of the future.

A useful financial plan is not a document that’s set in stone. It’s a living
breathing process that requires goal-setting, organization, expectations and
course corrections as the plan becomes reality.

A financial plan can also help you decide how and when to spend your money
effectively. There is no right or wrong answer for everyone.

The idea is you combine your current financial circumstances with your goals,
set some reasonable expectations for the future and reassess along the way to
account for things going better or worse than planned.

Michael and I talked about spending vs. longevity risk on this week’s Animal
Spirits:



Further Reading:
What If You Retire at a Stock Market Peak?

Now here’s what I’ve been reading lately:

 * Capital will always flow to where it is treated best (Freedom Day)
 * How to succeed (Reformed Broker)
 * Overstating negative outcomes (Big Picture)
 * Just keep buying the book (Dollars and Data)
 * Why the past 10 years of life have been uniquely stupid (The Atlantic)
 * Your portfolio isn’t a financial plan (A Teachable Moment)

 


For disclosure information please visit:
https://ritholtzwealth.com/blog-disclosures/




NOW GO TALK ABOUT IT.

 * facebook
 * twitter
 * linkedin




MORE FROM MY SITE

 * Lies Investors Tell Themselves
 * How Benchmarking Impacts Your Decisions
 * Animal Spirits: Boomflation or a Recession?

 * @awealthofcs


BEN CARLSON, CFA

A Wealth of Common Sense is a blog that focuses on wealth management,
investments, financial markets and investor psychology. I manage portfolios for
institutions and individuals at Ritholtz Wealth Management LLC. More about me
here.  For disclosure information please see here. 

GET SOME COMMON SENSE

Sign up for my newsletter:

Email address:

Leave this field empty if you're human:



CATEGORIES

Categories Select Category Active Management Alternatives/PE/Hedge Funds Asset
Allocation Bear Markets/Crash Behavioral Finance/Psychology Bonds/Interest Rates
Bull Markets/Rally Career/Lifestyle Advice Company Specific Crypto/Gold Current
Markets Factor Investing Links Macro/Econ Market History Personal Finance Self
Promotion Uncategorized Wealth Management/Industry News

 * Contact
 * Privacy Policy
 * Terms and Conditions

© 2022 A Wealth of Common Sense.


GET A FULL INVESTOR CURRICULUM:
JOIN THE BOOK LIST

Every month you'll receive 3-4 book suggestions--chosen by hand from more than
1,000 books. You'll also receive an extensive curriculum (books, articles,
papers, videos) in PDF form right away.

[mailbag_mailchimp]



Update Privacy Preferences