Retirees Spend Lifetime Income, Not Savings
The shift to defined contribution savings plans means that more retirees must fund spending from savings. Prior studies find that there appears to be a behavioral resistance to spending down savings after retirement in a manner that is consistent with life cycle models. We explore how lifetime income, wage income, capital income, qualified savings, and nonqualified savings are used to fund retirement spending. We find that retirees spend far more from lifetime income than other categories of wealth. Approximately 80% of lifetime income is consumed, on average, versus only approximately half of other available savings and income sources. Overall, the analysis suggests that converting savings into lifetime income could increase retirement consumption significantly, especially for married households.
The shift from defined benefit to defined contribution savings plans means that retirees must decide how much to spend from savings. Estimating how much income can be withdrawn from investments in retirement, particularly when paired with limited financial knowledge, an unknown lifespan, and an array of available financial resources to consider, including Social Security, pension, wages, and investment assets inside and outside of retirement accounts, is far more complex than the consumption decision of younger households who rely primarily on wages. This complexity may lead retirees to spend less than life cycle theory would suggest, resulting in reduced well-being and higher unintended bequests.