But a funny thing happens when they retire and it's time to start spending the money they've saved, says Michael Finke, a professor of personal financial planning at Texas Tech University in Lubbock. They can't do it. They're so used to thinking of savings as sacred that they don't touch the money, even if it crimps their retirement style of life.
Why do they hesitate? Among other reasons, they see their savings as their defense against future inflation and scary medical expenses toward the end of life. These fears might be overblown.
Studies by David Blanchett, head of retirement research for Morningstar Investment Management, found that, on average, retirees reduce their real, inflation-adjusted spending as they age through their retirement. That includes people with comfortable savings as well as people without.
For example, most IRA money isn't touched until withdrawals become mandatory at 70 1/2, by which time the total dollar amount is generally up because of investment returns. When normal medical costs begin to rise, these retirees have effectively prepared for it by cutting their spending — and growing their savings — in advance.
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There are natural ways that retirement spending declines. You're no longer paying Social Security or Medicare taxes, or contributing to a retirement plan. Workaday expenses go away — commuting, clothing, meals out because you didn't have time to cook. Younger retirees might pick up the slack by spending more on entertainment and travel. But on average, even those who increase their spending do so at a rate that's lower than inflation, Blanchett says. Put another way, their real spending falls.
Finke thinks that good savers shouldn't be afraid to live a little higher on the hog. Depending on their current expenses, relative to savings, people with moderate nest eggs might safely spend something around 8 percent more per year than they're doing now, he says. For those with high savings, it could be as much as 50 percent more. At the very least, consider spending all of your income instead of adding part of it to savings, as thrifty retirees often do. After all, retirement is what you created that income for.
The averages, of course, gloss over the very personal situation of every household. Some retirees have to cut spending because they retired with a mini nest egg or none at all. Some lost their jobs or had to cut spending when their spouses died. Some but not others will have their savings drained by medical expenses. You might have no choice but to live on less.
If you have a choice, however, and won't touch your capital, you're part of what researchers call the "retirement consumption puzzle." Maybe you limit spending out of deep-seated fear — that you'll live too long, run out of money, or make an irremediable financial mistake. When you lack confidence in your spending rate, your attitude shifts to preservation, just in case. A few hours with a fee-only financial adviser might give you great comfort, by showing you what you can actually afford.
Maybe, of course, you're perfectly happy living on less and leaving more for your kids. Still, you might shake yourself up a bit. Spending a little more money can add variety to a retirement life.
Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW.