By Dylan Huang
For much of our lives, we are told to save what we earn – for fun things like activities with friends or travel, and later for more ‘serious’ things like college, the purchase of a first home, a child’s education and retirement. Over the course of decades long careers, we save and invest what we can, try to take advantage of available company-sponsored retirement savings options and diversify our holdings to ensure we can retire and weather whatever economic volatility may arise along the way. Most of us are only familiar with working and saving, so the idea that we may live in retirement almost as long as we are working is theoretical at best. As a result, we become trained to accumulate and grow our assets. But, what happens when we reach retirement and it comes time to transition to decumulating – spending – these hard-earned funds?
One answer – for those who rely heavily on their portfolios to generate income in retirement can be found in research our team conducted on what we’ve defined as the Decumulation Paradox.
We found a few key trends among retirees that are worth exploring:
Retirees do not systematically withdraw from their retirement assets. Despite a wealth of research and planning advice over the last couple of decades predicated on the thinking that by utilizing a safe withdrawal rate, retirees can confidently draw down their portfolios, actual retiree behavior paints a more complicated picture. In fact, 2017 research from Greenwald & Associates shows that only 31 percent of retirees across all wealth levels systematically withdraw from their portfolios. Those that do are not tapping into portfolio principal and are instead withdrawing less than the portfolio earns. Our research found that many retirees seem to be trying to ‘self-insure’ their retirement funds by underspending.
In addition to Social Security, retirees rely heavily on dividend and interest income. Historically, retirees could maintain their lifestyle in retirement by implementing an income-focused asset allocation strategy and spending only income generated by their portfolios – which was often higher than their safe withdrawal rate. In a low interest rate environment like the one we have been experiencing, yields on dividends and interest-bearing investments have declined, leading retirees to further constrain their spending
Retirees tend to match income to spending and some continue to save. The old advice not to spend more than you earn often carries over into retirement, with many retirees identifying their basic and discretionary expenses and matching them up with steady sources of income. If there’s a gap, we often see retirees adjusting their lifestyles to fit within that budget, much like they did when they were working. In addition to constraining their spending, many retirees continue to save. In 2018, about one third of retirees across all wealth levels had higher non-housing assets 17-18 years after retirement than they did at the start.
These retiree behaviors are understandable. After all, lifespans are increasing and the fear of running out of money in retirement is very real. Fortunately, there are some things you can do to make the switch from growth to income easier.
Work with a trusted financial professional. You only get to retire once, so having a partner to navigate the preparation for and transition to the “spending” stage of your financial strategy will enable you to establish a system, outline priority areas and create dynamic strategies to fund them. Having help from a professional might even increase your confidence about what lies ahead. Results from recent research we conducted among members of the Sandwich Generation – those caring for children and aging relatives – suggest that individuals who have established a financial strategy and work with a financial professional are the most confident about their financial futures.
Determine the level of structure you need to feel comfortable spending. For some retirees, that may be allocating a certain amount annually for basic expenses and producing a ‘roadmap’ budget to guide you through which assets to spend first. For others, it may be continuing to have some lower-risk equity exposure so you can take advantage of any potential market upside (in line with your risk tolerance) as you adjust to your new decumulation strategy. Identifying what type of approach will help you shift your mindset to responsibly and enjoyably spend can make a big difference in quality of life in retirement.
Consider the role of guarantees in your portfolio. Will having a “pay day” through guaranteed income solutions help you feel more comfortable spending before truly dipping into your portfolio’s principal? Consider starting with Social Security and Pensions before considering other avenues of guaranteed income (all guarantees are backed by the claims-paying ability of the issuer) that can help breakdown your assets in a predetermined way. When used correctly, income annuities can be powerful long-term retirement tools that ensure basic needs are covered and establish an income stream for life.
Behavioral psychology is a meaningful factor shaping how retirees cope with the financial aspects of this stage of life, but with the right tools, including the help of a professional, the right structure and the exploration of guaranteed income solutions, you can have the financial freedom and the confidence to live the retirement lifestyle you’ve been dreaming about.
About the author: Dylan Huang
Dylan Huang is Senior Vice President and Head of Retail Annuities, Investment Solutions and Wealth Planning at New York Life. In this role, he is focused on the development and distribution of New York Life’s retirement income and investment solutions as well as enhancing New York Life agents’ ability to deliver financial outcomes rooted in protection for clients.
Dylan began his career at New York Life as an actuary in 2001 and advanced to leadership roles of increasing scope in the company's Life Insurance, Annuity, and Corporate Finance divisions. He is recognized as a thought leader in the retirement industry for his product development, patents, award-winning research, and service as a board member for the Insured Retirement Institute and the New York Life Center for Retirement Income at The American College. He is frequently sought by members of the media for insights on retirement topics. Dylan holds a Master’s degree from the University of Connecticut and a Bachelor’s degree from the University of British Columbia.