Overspending in retirement is a huge issue, in large part because people don’t know how much they have saved and they take too much out of their savings when they do retire.
A recent report by Securities America found that 43 percent of Americans have less than $10,000 saved for retirement. Eighty percent of those surveyed said they expect their standard of living to rise in retirement, but only 49 percent of Americans said they were somewhat or very confident they had enough money to live comfortably in retirement.
There is a major disconnect between how much people save for retirement, what they live on outside of retirement and what they expect to get in retirement.
The Principal coaches advisors about how to deal with people who are overspending in retirement.
“It is a very common problem,” said Drew Denning, vice president retiree services division at The Principal. “It is not an isolated situation. It is a systemic issue.”
If people didn’t save enough for retirement anyway and then haven’t compromised their standard of living, the money won’t last the 30 years it needs to, he added.
The Principal provides educational materials to advisors so they can work with their clients to conduct a top down assessment to find out where they need to cut back so their money will last through retirement. This helps them break down what they are spending on everyday living expenses and what they are spending on non-essential items. Advisors also ask clients to admit whether they took money out of their personal savings in the past year and how much money they have in retirement savings.
“For every $5,000 you are spending, you better have $100,000 behind it backing it up,” Denning said. “That’s why we do a top down assessment, to find out if we’re doing minor surgery or significant surgery. … I think a lot of retirees are overspending and they don’t have a clue they are doing it.”
The Principal conducts a quarterly well-being survey in the first quarter of last year. The survey asked respondents how much they could take out of their retirement savings and still have enough to sustain them through retirement. Fifty-six percent of retirees thought they could take 6 percent or more. Thirty-four percent thought they could take 8 percent or more.
“At an 8 percent withdrawal, you are going to run out of money in the first 25 years of retirement,” he said.
Most financial advisors tell clients they should expect to withdraw 3 to 5 percent of their retirement savings each year.
Zach Parker, first vice president of income distribution and product strategy at Securities America, said that overspending in retirement is a very large issue because there are a lot of individuals who had a hard time controlling their spending when they still had money coming in.
“In our society it is a big issue from an emotional perspective. People have gotten into that stance where they don’t want to wait, no delayed benefit, I have to get it now and I will figure it out later mentality. That will come back to bite people down the road if conversations don’t take place,” he said.
Securities America helps its clients set expectations and really identify that past behavior. “Past behavior is a good indicator of future performance in the overspending arena,” Parker said. Securities America speaks to its clients about reasonable expectations.
The key is to have a retirement plan in place. If clients want to replace 85 percent of their current salary in retirement, they need to find out what their end goal is. How much should they be saving now to reach that goal in the future? If people are having this conversation for the first time in their mid-50s or 60s, the harsh reality is, they will be working into their 70s so they can put some money away in their accounts, he said.
“The sooner they take corrective action to fix the issue, the easier it will be on [them],” Parker said. “It doesn’t have to be 100 percent corrective actions. Those steps can be painful. Taking those little steps at a time is an important piece of the process we tell advisors to work through.”
One approach that has worked for Securities America is to have its clients think about pre-retirement before they retire. The company’s advisors tell clients try to live on their retirement budget for about three months before they quit their job. That way, if they decide they can’t live on that amount of money, they haven’t burned their career bridge, he said.
Having a lot of debt is a problem in retirement. “It is far more likely for someone to meet their retirement goals if they are out of debt when they retire, than people with a lot of debt above their mortgage,” Parker said.
Saving enough for retirement is another problem. The Principal is working with its plan sponsors on how to structure their employer match to help participants save between 10 and 15 percent of their earnings for retirement, Denning said. If individuals save 13 percent a year over 40 years, they could replace 85 percent of their pre-retirement income. That figure does take into account Social Security benefits.