Asset Decumulation or Asset Preservation? What Guides Retirement Spending?

By Sudipto Banerjee, Employee Benefit Research Institute

Many analysts and retirement planners advocate that retirees systematically spend down their accumulated assets to fund their retirement needs over their remaining lifespan. While the theory might make sense, how do retirees actually spend down their savings.

The Employee Benefit Research Institute (EBRI) recently issued an insightful report that studied how quickly retirees spend down their savings, based on an analysis of data from the Health and Retirement Study (HRS). The study showed that generally retirees prefer to preserve their savings, for a variety of reasons. They tend to spend down their assets at rates slower than suggested by asset spend-down strategies. The most common financial management strategy used by retirees is to reduce and manage their spending to the level of regular income received from Social Security, pensions if available, and perhaps investment income on savings. Of course, there are exceptions and outliers to their observations that are identified and discussed in the EBRI report.

The EBRI report provides fascinating insights into the spending habits of retirees, which in turn can help devise retirement income strategies.

This article was recommended by Steve Vernon, FSA, Research Scholar in the Financial Security Division at the Stanford Center on Longevity.