When my father died, more than 20 years ago, he left my mother with a paid-off Philadelphia apartment, a modest pension, Social Security, and $1.6 million in retirement and brokerage accounts. My mother lived well, but frugally. She loved a Saturday at the boutiques but never got over waiting for a sale. She delighted in orchids but would buy them from only Trader Joe’s, where the blooms could be had for $10.99. “They last longer,” she’d argue. And once a year, she would ask me to go over her budget to make sure she was doing okay. “More than okay,” I’d tell her. My brothers and I encouraged her to spend—to take that trip, to redo that bedroom. But she limited herself to the pension and Social Security checks and the interest she was earning while refusing to touch the principal. When she passed away two years ago, she no longer had the $1.6 million my father left. She had $1.7 million.
My mother’s behavior turns out to be quite common. A landmark 2018 study by the Employee Benefit Research Institute found that the median individual with more than $500,000 in savings had, 20 years into retirement, spent just 12 percent of that sum. And a Corebridge/Greenwald Research survey of older adults with at least $100,000 showed that only 28 percent were comfortable watching their savings taper off to cover living expenses, ostensibly exactly what the money was saved for in the first place.
This is a problem—not just for retirees but for the country. Savers who forgo gratification for decades end up not enjoying the money they’ve worked so hard to set aside. Meanwhile, the U.S. economy suffers as all of that money sits under the proverbial mattress instead of being spent.
[Charley Locke: Retirement gets harder the longer you wait]
Why do retirees refuse to spend their retirement savings? One answer is fear. People worry that they’ll live too long, that inflation will rise, that a bear market will hit at the worst possible time. Another answer is habit. After decades of disciplined saving to reach a target number, flipping the switch to spending feels uncomfortable to many and just plain wrong to others. Seeing one’s number move in the opposite direction feels more like losing money than spending it.
The result is that retirement-account balances are treated like other precious items, which is to say they’re hoarded. Suzanne Shu, a marketing professor at Cornell, has studied when and how we consume things we consider special—bottles of better-than-average wine or boxes of pricey chocolate, gift certificates to favorite restaurants or spas—and found that we’re so afraid of using them too soon that we might never use them at all. The wine goes bad, the gift cards expire, and the chocolates develop that odd, whitish coating. And the retirement account goes unspent.
Since 1992, the University of Michigan Health and Retirement Study has tracked a group of 20,000 people, all over 50, through time. (New subjects are periodically added as others die or stop responding.) Every two years, these individuals and couples are questioned on a huge variety of topics related to health and retirement, including work, family, caregiving, disability, cognitive changes, divorce and widowhood, and, yes, spending. Using this data set, the researchers have identified what they call a “retirement consumption gap.” Huge numbers of retirees are spending less—sometimes far less—than they could afford to spend for the rest of their life without fear of running out. For middle-income Americans, the gap is about 8 percent, or about $8,000 a year on average. That’s a car payment, a vacation, a whole lot of dinners with friends. Wealthier retirees, meanwhile, are spending as much as 53 percent less than they could afford. A gap remains even when plans to leave a legacy or reserve money for health care are counted as spending. Bucket lists everywhere are suffering.
And so is the wider economy. We can see this by looking at pensions, which retirees tend to spend because—unlike having a lump of money sitting in a bank account—they know that another payment is coming. According to a study by the National Institute on Retirement Security, in 2022, 26 million retirees received more than $680 billion in pension benefits. As they used it for rent, groceries, vacations, home repairs, and everything else on their lists, the money in turn generated $1.5 trillion in economic impact. The funds paying out those pensions contain just more than a quarter of the money held in America’s retirement accounts. If we apply the same math and assume that every dollar used translates into $2.28 in economic activity, then $52 trillion of potential consumption is sitting in the hands of the country’s retirees, much of it not being spent.
Americans hold about $20 trillion in IRAs (most of which is held by retirees) and another $15 trillion in 401(k)s and other defined contribution plans (35 to 45 percent of which is held by retirees). According to the economists David Blanchett and Michael Finke, retired couples spend only about 50 percent of withdrawals (including mandatory distributions) from investment accounts, compared with 80 percent of guaranteed-income payments such as pensions and Social Security. In that way, the retirement consumption gap is essentially a lagging byproduct of the corporate shift from pensions, which employers paid for, to 401(k)s, which employees mostly fund themselves, in the 1980s and ’90s. This transition was supercharged by the Pension Protection Act of 2006, which allowed employers to automatically enroll workers in a 401(k).
One way to close the retirement consumption gap, then, is for retirement savers to think about some of their assets as pensions and then, upon retirement, to convert them into a source of stable income—what I call a “forever paycheck.” In my new book, I recommend converting enough to cover both the needs and the discretionary wants that retirees aren’t willing to give up, generally about one-quarter to one-third of that nest egg.
[Faith Hill: The sneaky-saver generation]
A forever paycheck can be built with investments that spill off income—dividend-paying stocks, say, or a bond ladder. Or it can be bought with annuities, a category of insurance products through which a lump sum of money, deposited either all at once or over time, is used to provide a lifetime stream of income. Annuities trade away the potential upside of an investment account in favor of certainty that investments cannot provide; they have long been criticized for high fees and unnecessary complication. But these vehicles have become both more transparent and cheaper in recent years. The movement of big 401(k) providers, including Vanguard, Fidelity, and BlackRock, into the annuity market means that fees will likely go down even more in the future.
For most people, having somewhat less money but actually spending it leads to a better quality of life than having more money that they’re scared to touch. It might even lead to a better quantity of life. A recent National Bureau of Economic Research paper looked at the choices made by 600,000 retirees in Chile, where citizens can either annuitize their retirement payout, locking in a fixed payment for life, or opt for phased withdrawal that varies with the markets. Annuitization guarantees that the money will last as long as they do. Phased withdrawal offers upside, but retirees can also run out. The researchers found that those who chose the annuity had substantially lower mortality rates both five years and 10 years later. They also spent more money on health care and reported lower rates of disability.
Living paycheck to paycheck—a phrase that has been around since at least 1948, when it appeared in a Communist campaign pamphlet entitled “How to Make Your Vote Count”—has always had a negative connotation. It suggests surviving, not forging ahead. Treading financial water. That feeling is understandable during someone’s prime working and accumulation years. But when the time comes to reap the rewards of saving, living paycheck to paycheck turns out to be a pretty good idea.