New research suggests retirement plans may be missing a key behaviour in retirement fund spending
How much do you need to retire with the lifestyle you want?
It’s a simple question asked by financial advisors’ clients every day but the answer you get probably overlooks a key factor of retired living according to a new white paper.
Global investment manager T. Rowe Price has analyzed retiree spending habits and found that spending decreases annually by 2%. Although, perhaps not in the past year with many retirees supporting their families through the pandemic.
The interesting factor of the decrease in annual spending is not about doing less or wanting less, it’s about wanting to maintain a spending level that avoids drawing down on their assets.
Retirees will therefore cut their non-discretionary spending on items such as food and shelter, to maintain the fixed income level they expected.
The white paper suggests that advisors take time to understand clients’ personal preferences between asset preservation and lifestyle or spending preservation, when planning each client’s retirement income options.
"Understanding how retirees spend is crucial to aligning retirement income solutions," said Sudipto Banerjee, vice president, Retirement Thought Leadership at T. Rowe Price. "Plan sponsors and financial professionals need to understand the motivations behind retiree spending in order to provide optimal retirement income solutions."
Wealthier clients are more agile
The research concluded that wealthier retiree households have more room to adjust their spending to protect their retirement income.
Those in the bottom 20% of household net worth may therefore benefit more from additional guaranteed income, contrary to popular wisdom.
The white paper also notes that many retirees would benefit from ongoing assistance from a financial planning professional as they progress through their retirement and their priorities and abilities change along with their circumstances.
