By MATTHEW DRINKWATER
People spend decades saving for retirement. Then some people reach retirement — but they don’t do anything with their savings and investments.
Ten years later, they’re still not withdrawing even a dime from their accounts. In some cases, many have more money now than they did at the start of retirement.
That’s the case for about a quarter of retired investors, according to LIMRA Secure Retirement Institute research. Who are these retirees who refuse to crack open their nest eggs?
In a recent LIMRA SRI survey of more than 500 retiree investors, 3 in 10 reported that they are taking regular, systematic withdrawals from their savings and investments. Nearly half reported that they are taking occasional withdrawals, but 26 percent are taking neither systematic nor occasional withdrawals.
LIMRA SRI describes retirees who don’t withdraw their assets as “Preservers.” While Preservers resemble their savings-tapping counterparts in most respects, they typically can be distinguished in five ways:
1. Age. Younger retirees are less likely than older retirees to make withdrawals. Often, they haven’t yet reached the age when the IRS requires their taking minimum distributions from qualified retirement savings accounts.
2. Years into retirement. Those further into retirement are more inclined to withdraw assets. This is partly a function of age, although those who retire at a relatively old age may only be a few years into retirement.
3. Sources of income. Those retirees who have more income from lifetime-guaranteed sources have less need for withdrawals from their savings. More than 4 in 10 retiree investors who receive 50 percent or more of their income from traditional defined benefit pension plans are “Preservers.” In contrast, among retiree investors for whom pension plan income represents 15 percent or less of their income, just 2 in 10 are Preservers.
4. The timing of retirement. People who retire when planned are less likely to take any withdrawals (70 percent) than those who retired earlier or later than planned (77 percent and 89 percent, respectively). The link with pension income may be relevant — eligibility for full pension benefits could anchor retirement timing.
5. Sufficiency of guaranteed lifetime income to cover expenses. Two-thirds of retirees say that Social Security, pensions or other forms of guaranteed lifetime income are enough to cover their basic living expenses. Of these retirees, one-third are Preservers. But among retirees for whom these income sources are not sufficient to cover basic living expenses, only 12 percent are Preservers.
These characteristics by themselves provide clues to explain Preservers’ behavior, but even more revealing are Preservers’ top stated reasons for not taking regular withdrawals from their savings and investments.
First, about 6 in 10 Preservers claim to be just fine living off whatever income sources they are receiving. But research by the Employee Benefits Research Institute suggests that “need” is an elastic concept; retirees, regardless of wealth level, appear to adjust their spending to match how much they received from regular ongoing sources.
The second most common reason is that more than half (51 percent) of Preservers plan to access their retirement accounts later in retirement, possibly when forced by law to do so (due to required minimum distributions). If some portion of their assets were converted into guaranteed income, while keeping another portion in reserve for long-term needs, Preservers could boost discretionary spending in the “go-go” early retirement years without being concerned about running out of money.
Do any of these Preservers present opportunities for providing advice and solutions? In short, yes.
Those who are early in retirement, and have not yet determined how best to deploy their assets, will likely not have everything squared away. More and more of these retirees will be “assets rich and income poor,” lacking the same options as prior generations to live off pensions and Social Security exclusively. Many will have questions about how much they can “safely” spend on discretionary expenses without putting themselves at risk later in retirement.
A formal planning process, resulting in a detailed plan for managing income, expenses, and assets in retirement, would allow more retirees to safely deploy their assets, either through systematic withdrawals or conversion to lifetime-guaranteed income (annuitization).
LIMRA SRI research shows that those who have formal written retirement plans are more likely than those without them to take systematic withdrawals. Comprehensive plans developed by advisors would also address risks associated with health or long-term care costs by apportioning savings for specific goals. A well-designed plan should convince more Preservers to crack their nest eggs, and thereby achieve their dreams.