A new survey from Global Atlantic found that 39% of retirees are spending more than they anticipated. Nearly half (49%) of those that are in pre-retirement (classified as those aged 40 and over) believe that planning for retirement is more difficult than it was for their parents.
It’s often said that people need to plan to spend 70% to 80% of their salary in retirement. But certified financial planner and author Harold Evensky says that figure can be misleading.
“As a financial planner, I work with people of significant resources and I found it common they spend significantly more – because now they have time to spend money,” he says.
A 2018 report from Massachusetts Mutual Life Insurance found that while 50% of retirees spent less in their retirement, 49% spent the same amount or more.
The Global Atlantic report found that while some 40% of retirees were spending more than they were when they were working, the typical retiree spends about 32% less. Common areas for cutbacks included discretionary expenses like dining out, traveling, and entertainment.
That’s worrying to Evensky, who says that discretionary spending usually increases in retirement. If people are cutting back on those expenses, he argues, it’s not by choice.
“There’s a lot of research indicating people spend less but the real highlight is that retirees spend less but not by choice,” says Evensky, who is chairman at the Evensky & Katz/ Foldes Financial Wealth Management firm. “They’re cutting back on restaurants and on travel, while the one thing they have more of is time. More time to go to restaurants, and on entertainment, and traveling to see grandkids.”
“The places they are cutting spending their money is lifestyle — so that’s not choice.”
Evensky says bad planning is to blame.
“I think the primary reason is very simply, poor and naive planning,” he says. “People don’t realize what’s going to happen when they retire. And they don’t have a traditional pension backing it up. After that, even though we are in a low-inflation environment, things are costing more. And they have more time on their hands so there are more things they want to spend money on.”
That’s in line with the survey which found that when it came to retirement planning, more than half of the 4,000 people surveyed expressed regret. More than a third regretted not saving enough, the most common regret. Another 20% wished they didn’t rely so much on Social Security, and 12% wished they paid down their debt before retiring.
‘Expect to work longer’
These sentiments are common, Evensky says.
“The prior generation relied much more heavily on company pensions that are disappearing,” he says. “Very simply, individuals are much more on their own today. It’s sad but I think it [the report] mentioned the three-legged stool. One of the legs is disappearing.”
The three-legged stool often refers to the three sources of retirement funds: Social Security, pensions, and personal savings.
But as pensions become less common and Social Security’s prospects grow less certain, Evensky is worried for future generations.
“There will be less independent support. More and more people will be more and more dependent on their own resources,” he says. “Having your cake and eating it too [before you retire] will become more and more difficult.”
Evensky says it’s time for people to start getting realistic about what they want in retirement.
“Save more and expect to work longer. Be realistic about what your goals are. If you want to have a life now and not put your axe to the grindstone all the time, then be realistic about what your retirement is going to look like,” he says.
“Market returns are going to be extremely modest over the next 10 years, so I don’t think you can be bailed out on returns,” says Evensky. But if you don’t mind leading a “low-cost lifestyle” now, than it’s realistic to expect in your retirement you can join golf clubs, and go on trips, he says.
“The sooner people start getting realistic and planning, the happier you’ll be.”
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