When I first entered the retirement industry, planning was commonly described in terms of a three-legged stool. The “legs” were the three traditional retirement income streams: Social Security; pensions and personal savings.
Today this analogy feels outdated. Americans can’t rely solely on Social Security to pay bills in retirement. Few private companies even offer pensions, and many corporate and governmentpensions are woefully underfunded. Most Americans have some personal savings by the time they retire, but dozens of studies show that these savings fall short.
In order to more effectively meet retiree’s spending needs, savvy financial planners and other investment professionals are looking to diversify income beyond the old three-legged stool approach. A recent study we commissioned at Global Atlantic collected and analyzed data from more than 4,200 Americans (some retired, some still saving) on what they spend in a typical month.
The study found that close to two in five (39%) U.S. retirees are spending more than they expected, and just under half (49%) of pre-retired consumers (ages 40+) believe planning for retirement is more difficult for them than it was for their parents.
The study also found that the typical non-retired U.S. consumer over the age of 40 spends $2,993 a month, on average. This figure includes the costs of housing; other essential expenses, such as food and medical care; and discretionary expenses, including travel and entertainment.
We were surprised to see that the average retiree spends about a third less than that, $2,008 a month. The survey found that retirees spend considerably less in almost every major area, including discretionary expenses, such as entertainment (29% less); dining out or restaurant take-out (24% less); traveling (18% less); and housing (23% less on mortgage payments and 22% less on rent).
Retirees tend to reduce spending once they realize they are unprepared for how quickly expenses add up.
According to the findings, retirees tend to reduce spending once they realize they are unprepared for how quickly expenses add up. In addition, “most [retirees over 85] are comfortable with frugality,” states Anna Rappaport, chair of the Society of Actuaries’ committee on post-retirement needs and risk, in an article written for NextAvenue, concluding that “most retirees adapt to their circumstances and are resilient.”
Power of predictable income
However, we noticed certain subsets of retirees who spent considerably more than average. The average retiree with a pension spends 39% more that those without one ($2,379 vs. $1,709), and just 20.5% less than pre-retirees, suggesting that predictable income instills greater freedom and confidence in their security.
Where does this leave those without pensions? These individuals can achieve similar outcomes with annuities. The average retiree with an annuity spends 37% more than those without annuities ($2,545 a month vs. $1,850 a month), and just 17.6% less than pre-retirees, reinforcing the power of predictable income.
Retirees collecting income from pensions or annuities are able to maintain greater expenses than those who do not. Presumably, they do not need to make as many sacrifices and are thereby able to enjoy a more fulfilling retirement. Retirement savers, especially those lacking a pension, should look for ways to diversify their income streams and ultimately maintain the lifestyles they worked so hard to achieve.
Paula Nelson is president, retirement, at financial services company Global Atlantic Financial Group.