The Saving Paradox: Why Most Retirees Secretly Struggle #Finance

it’s no surprise that transitioning into retirement is extremely difficult in today’s CashNews.co I’m going to illustrate one of the Hidden ways retirees struggle as a result of something that I call the Savings Paradox I’m a certified financial

planner and the owner of an independent Financial Planning firm and every year I spend hundreds of hours helping my clients navigate the difficulties of retirement planning to achieve happy stress-free retirements the reality of retirement can be very very different from what many

expect part of this is a result the fact that the routines and behaviors that support us during our working life can actually work against us once we enter retirement the largest issue of all is tackling the shift from saving psychology to spending psychology So today we’re going to break

down the Savings Paradox which I like to call the permission to spend problem and discuss what you can do about it the saving Paradox or permission to spend problem is a psychological state of mind that keeps well-prepared retirees from spending their wealth in retirement

well-meaning and well prepared retirees spend their entire life delaying gratification and stalking away money in order to prepare for retirement and then suddenly retirement arrives at your doorstep and you and Society give yourselves every reason that you should not or could not spend your wealth

now the best illustration of this problem comes from a Michael kitus article entitled why most retirees will never draw down their retirement Portfolio we’re going to review this study for a second time today it was in another recent CashNews.co of mine but buried pretty de

deep in the CashNews.co and after reviewing it I’m going to teach you how to identify if you are suffering from this problem as well as what you can do to solve it the article makes several key points the first key point is affluent retirees relying on their Portfolios in

retirement are failing to spend even their annual Income in their retirement years and the more affluent the worse this trend gets now in this study affluent is is defined as a retire with at least $333,000 in total wealth including housing the second key point from the study

2third of retirees using a 4% initial withdrawal rate end a 30-year retirement with more than double their starting principle let me repeat that if you start with the 4% withdrawal rate you end 2third of the time you end with more than double your starting principle now even more shocking is that

you are more likely end to end up with five times your initial principle than you are to even dip into principle if you use a 4% withdraw rate just think about that you’re more likely to 5x your wealth than you are to even touch your original starting dollar amount if you use a 4% withdrawal

rate the third key point from the study even in the unlikeliest of cases where a retiree does end up spending down their wealth it doesn’t typically occur until a retiree is in their late 80s which is well past the average life expectancy of most Americans the fourth key point from the study

limiting spending in early retirement does have a prophylactic or defensive effect the issue with this is that many retirees think they will make up that spending later in retirement but it’s even harder to spend one’s wealth and later retirement due to the limitations of aging and so

most retirees never recoup that quote unquote deferral kitus goes on to state that as a result of this permission to spend problem which he calls the consumption Gap from the beginning of 2000 to the end of 2008 a very challenging time of mediocre returns for retirement Portfolios

when in theory account balances would have dipped with ongoing withdrawals the average Financial Assets of the median retirees still continued to increase in retirement to illustrate these points kitus reviews two scenarios which I’m going to show on the screen and quote

directly from his article so scenario one for instance imagine a retiree who has a $1 million balanced Portfolio and wants to plan for a 30-year retirement Inflation averages 3% and the average returns of the balanced Portfolio are 8% over the

30-year period now to make the money last for the entire time Horizon the retiree would start out by spending $61,000 in year one of retirement so that’s a 6.1% withdrawal rate and then adjust each subsequent year for Inflation spending down the retirement account balance by

the end of the 30th year as the chart on the screen reveals though projected spending that plans to spend down the Assets by the end of a 30-year retirement still would spend less than the growth in the retirement account for the first 10 years and wouldn’t actually dip into

the principle until the 17th year out of 30 that’s assuming modest 3% Inflation and long-term returns of 8% which is the approximate average for the past 100 years now let’s look at a second scenario in scenario 2 we take a more conservative approach and a gloomier

Outlook and instead projected a balanced Portfolio to grow at only 7% as you can see here on the screen Inflation at 4% which would be high and so the spending in year one initially starts at $49,000 which is 4.9% initial withdrawal rate we have the same million

doll Portfolio invested in a balanced Portfolio the Portfolio value would peak in year 11 and you wouldn’t dip into principle until year 18 now the reason this is important is in the context of this more conservative scenario a 65-year-old

retiree’s life expectancy is only to their mid 880s which means that a significant number of retirees who use this as their plan spending strategy will actually pass away before they ever materially dip into retirement principle at all so clearly the challenge in retirement is balancing early

retirement spending without adding undue risk to the back portion of retirement now to be clear it is perfectly okay to have a goal of spending less and early retirement in order to have more stability at the end of retirement or so that you can intentionally leave a legacy to airs ultimately the

study that underlies the kitus article the study is titled spending in retirement determining the consumption Gap makes some additional interesting points the first feelings of inadequate preparation May shift retirees mindsets from decumulation to preservation meaning that feelings of fear may

keep someone from spending their Assets and focusing too much attention on preserving their Assets the study found that rather than depending on long-term Financial Planning retirees are myopic and overly rely on their intuition or their gut when

adjusting consumption and Investment Strategies and this situational approach to post-retirement consumption can increase retirees vulnerability to loss aversion you know translated into English that just means that going based on one’s gut or intuition actually leads to

lower levels of confidence and increased anxiety in retirement now the study continues when loss aversion is present or fear of loss is present retirees May frame spending down their Portfolio as a risky proposition and view the conversion of funds from Financial

Assets to fund current spending as a loss meaning they think of spending out of their retirement Savings as a loss rather than as an activity that was intentionally saved for now retirees plagued with this fear of loss may spend less as a defense mechanism to

protect against making a perceived Financial mistake so ultimately what I believe is underlying all of this is the fact that Brokerage companies mutual funds index funds and financial advisers all over the country know and understand that retirees behaviors are influenced by these

fears and therefore because these Brokerage companies mutual funds index funds and financial advisers have a financial incentive to convince retirees that if they spend their money they will be at risk of running out they promote the following types of material the 4% rule for

instance or even that Social Security at 70 delaying Social Security is always the best strategy or that Taxes are always bad when in fact Taxes are simply the cost of extracting wealth and if planned appropriately for they’re just simply another expense that

can be planned for for or even something like don’t retire before 65 because health Insurance before Medicare is too expensive and prohibitive or live on pennies so that you can obtain Health Care subsidies even if your retirement Portfolio could both afford

to pay you well and pay for Private health Insurance Prem Medicare now some of those activities May in fact be valuable and even the right thing to do in a particular scenario they’re just not universally right and the only Universal purpose those things serve is to benefit

Financial actors who annuitize fees while your Assets grow at your expense and the retirement consumption Gap study finally concludes with after retirement the reward of efficient market returns from effective management of Market risk that was dominant during accumulation meaning

the reward of searching for higher market returns while you’re Savings while you’re in the saving phase I’m sorry may be less important than stable reliable Income from effective management of risks related to uncertain lifespan and medical costs

and these actions may increase the confidence of a client and lead to spending patterns more consistent with the goals that motivated your Savings behaviors remember you saved in order to have funds for funding your retirement and if we save and then don’t spend it we

actually aren’t acting consistently with our initial goals now retirement Income conversations may need to move away from conversations around sustainable withdrawal rates and towards strategies that maximize spending for a given level of financial Assets

while addressing concerns about uncertainties a shift of this nature would ensure that clients receive the highest possible satisfaction from their accumulated wealth and that comes again from the consumption Gap study now ultimately you can see that the permission to spend problem is in fact real

retirees aren’t spending down their Assets and it’s not because they can’t it’s because they are afraid to so through my work I found that most retirees don’t clearly know what they can spend and therefore never consider what they might spend their

wealth on if they knew that they could spend more and therefore they never evaluate how much extra satisfaction they might get from those extra activities ities because they never allowed themselves to consider because they couldn’t imagine World in which they could actually fund those

activities let me give you an example imagine you live on the west coast and your kids and grandkids live on the east coast all your life while you have been saving you can only afford to go visit one time per year because that’s what fit within your budget so when you retire you assume that

you can only go one time per year you actually just don’t know any different but what if you found out through Good Financial Planning that your retirement Assets could support five visits per year and that it wouldn’t hinder your retirement in any way

would you then consider going more often now I don’t know the answer to that and I’m not trying to supply anyone to answer to that that’s simply a personal choice but my belief is wouldn’t you rather know that you have the option and aren’t putting your retirement at

risk as a result of that option rather than simply not knowing at all and so I’ll conclude this CashNews.co by making the same case I do at the end of all my CashNews.cos start retirement planning at least 5 years before retiring in that way you can learn the true possibilities and tolerances

of your Savings and saving behaviors and therefore you can craft the truly intentional retirement Strat strategy that will allow you to live the best life possible for your specific unique desires and if that includes spending very little while alive in order to leave a huge Legacy

for your kids or an endowment for a university you care about or whatever by all means go ahead and do so my hope for you is simply that you will do it out of intentionality rather than out of fear and with that said if you’d like to learn more about how we support our clients living their

best life in retirement you can visit our website at www.the peak.com and thank you as always for your time and attention and I’ll see you in the next CashNews.co