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Why Are We Seeing More Cases of “Fear of Spending” Among Retirees?

Why Are We Seeing More Cases of “Fear of Spending” Among Retirees?
December 10
00:03 2019

We hear all about “not saving enough” when it comes to retirement, but there’s another issue that can be worse: “not spending enough.” After a career focused on saving, when it comes time to retire, the saving tap is turned off and the spending tap is (supposed to be) turned on.

For many retirees, that’s when the sudden fear of spending kicks in. And there may be indications this phobia is reaching pandemic levels. “Yes. I have noticed a reluctance to spend as the cost of living goes up,” says Stephen H. Akin of Akin Investments, LLC in Biloxi, Mississippi.

But this experience is not shared by all advisers. “Having dealt with nothing but retirement folks for 35 years,” says Paul Ruedi, CEO of Ruedi Wealth Management, Inc. in Champaign Illinois, “I can tell you that in my experience, as the new retirees move further away from the depression era hangover, it has lessened quite a bit.

At least one study suggests fear of spending may not be as pervasive as reports indicate. “You may get someone to say they see this anecdotally, but in our study, we did not observe this,” says Alex Murguia, Ph.D.; CEO; Retirement Researcher, McLean, Virginia. “We had 1094 participants complete the Longevity aversion scale. A score of 1 indicated a strong tilt towards spending more earlier in retirement and a score of 6 indicated a strong tilt toward being extremely conservative and wanted to spend less. The average score was 3.33. This is indicative that the participants were pretty much split down the middle with a slight tilt toward spending earlier in retirement. 68% of the scores were between 4.54 to 2.12. A pretty good distribution.”

But other research indicates the issue of the decumulation phobia is rampant among certain demographics, including, ironically, the one that could most afford to spend. “This is a common phenomenon, especially among mass-affluent and affluent retirees,” says Brian Madgett, Head of Consumer Education for New York Life in New York, New York. “In fact, 2017 research from Greenwald & Associates found that only 31% of retirees across all wealth levels withdrew from their portfolios on a regular systemic basis.”

As you might expect, there is fairly obvious behavior explanation that undergirds what we see. “Life-long habits are sometimes difficult to change,” says Joseph Guyton of The Guyton Group in Portsmouth, New Hampshire. “Pair this with the major transition from a ‘working paradigm’ to ‘non-working paradigm’ (or a second career that pays a lot less) and you have powerful forces to overcome.

Financial professionals, 401k plan sponsors, and just about any retirement plan fiduciary have created an infrastructure of saving that has had a positive effect – as well a not-so-positive side effect – on retirement savers. “Advisers and the financial industry have spent the last 40 years telling people to save, save, save!” says Ron Haik, Senior Financial Advisor & Regional Manager, Ontario at Nicola Wealth in Toronto, Canada. “Now we want you to spend?! It is not easy to overcome the fear we as advisors have instilled in our clients for not saving enough.”





The outside environment has also exacerbated the situation. “Yes, and I think the 24-hour news cycles and financial news are part of the problem,” says Dan Pallesen, Chief of Investor Behavior at Keystone Wealth Partners in Chandler, Arizona. “So many of our clients are bombarded with financial ‘news’ that is not really news, its noise. The stories that are featured are often the stories that boost ratings. And the stories that boost ratings are usually on the extreme ends of the spectrum. Either the markets are at an ‘all-time high’ or the sky is falling.”

Pallesen, who is a Licensed Clinical Psychologist, explains the mental processing we undertake that leads to this behavior. “Our brain uses what is called the availability heuristic when making decisions. Basically, if information is easily available in our memories, that information will cloud our judgment. And information is easily available when it is extreme and sensationalized. When clients think markets are more volatile than they actually are, they tend to become more fearful and end up not spending as much as they can in retirement.”

Michael Gerstman, CEO of the Dallas-based retirement planning firm, Gerstman Financial Group, LLC, is also seeing more cases of “fear of spending.” He thinks the reason for this is that “people are living longer and there is a pervasive fear of running out of money in their lifetime. The odds of a married couple at ages 65 having one partner live to age 85 is about 90%.”

To some extent, this fear of spending could be growing as a result of the shift away from pensions. “Yes, and this is driven by demographics,” says Barry Gillman CFA, Research Director, Brandes Institute Advisory Board, New York, New York. “In the past 6-8 years, an increasing number of Boomers are reaching retirement age, and are significantly dependent on Defined Contribution accounts. This is the first time we have seen this combination. Prior generations had more reliance on Defined Benefit pensions, and as long as they didn’t spend more than their pension income they weren’t exposed to ‘fear of spending’.”

The bump up could also be the result of all the economic and market good news we’ve been seeing – at least with those sophisticated enough to understand the implications of “regressing to the mean.” Bill Hines, President/CEO of Money Coach Group, Inc in Nazareth, Pennsylvania, says, “We’re seeing more cases of ‘fear of spending’ because financially savvy retirees know they’ve been riding a long bull market leading up to retirement, and are now afraid of the worst-case scenario – retiring just as a correction happens. They remember well the market drops, home value declines, and horror stories of people who retired just as the 2008 recession was beginning.”

Add this to the constant drumbeat of exaggerated bad news and the result is retirees may be taking a “better safe than sorry” approach by living below their means. “Retirees I know are very focused on the need to be frugal, and many are unable to release the poverty mentality they grew up with,” says Elisa Robyn, PhD., a Wealth Relationship Psychologist in Arvada, Colorado. “The US economic structure is under a great deal of strain, the financial world is unpredictable, and the thought of another crash looms on the horizon. People are scared in general, and even more, frightened by the confusing money messages received on a daily basis. Financial institutions have crashed, home prices plummeted and they sky-rocketed, the US debt is out of control, budgets and services are cut and we are left wondering where the ax will fall next. The human fear of loss pushes us to save up in the face of impending danger.”

Government related benefits offer another area of doubt and suspicion. “Recently I have been seeing an increase in this ‘fear of spending,’” say Steve Parrish, Contributor and Co-Director of the Retirement Income Center at The American College of Financial Services in Des Moines, Iowa. “The two primary culprits are fear of whether Social Security will be reduced, and feared increases in the cost of Medicare. We are also seeing concern about the potential for long-term care expenses: retirees are worrying more about costs for ailments like Alzheimer’s.”

It all comes down to the level of confidence retirees have with regard to their ability to predict the future. Do they believe they can? “The answer goes back to uncertainty,” says Jeffrey Benowitz, of Certified Financial Services and Guardian in Paramus, New Jersey. “Uncertainty with what tax bracket they will be when they start spending their retirement money and whether that bracket will change. Uncertainty of how inflation will affect their savings and what they will be able to afford to live the lives they envisioned. Uncertainty of how their investments will perform in retirement and lastly uncertainty on how long they will live and the fear they will run out of money.”

We may be seeing and hearing more of these “fear of spending” stories as the population bulges of baby boomers finish entering retirement. “As greater numbers of people are entering into retirement than ever seen before, people are now living into their fears of living a long life, having a lot to handle in medical costs, and the inability to ‘safely’ generate income either in bonds or stocks,” says Michele Lee Fine, President of Cornerstone Wealth Advisory LLC and financial representative with Guardian Life, in Long Island, New York. “These are unprecedented times requiring innovative solutions. People continue to save and not spend either because they are anxious they won’t have enough for themselves, or adequate amounts to leave for their loved ones.”

In the end, human psychology rules the day. No matter what the economic data shows, the unknowns will continue to spook those unfamiliar with the heretofore unchartered terrain of retirement. As the same time they enter this new terra incognita, they are asked to flip their fiscal mental posture 180º. This is no easy task for anyone.

“In my 23 years as an adviser, I regularly see new retirees have hesitation getting comfortable with spending their own savings in retirement,” says Daniel P. Lash, a partner at VLP Financial Advisors in Vienna, Virginia. “I believe this comes from the 40 or so years that the client worked and saved regularly to be able to afford retirement but then like a light switch they stop saving and start distributing from their accounts for spending purposes. Savers have conditioned themselves to the idea of always saving and they do this for so long that spending their money does not come naturally to them.”

Perhaps, just as plan sponsors have developed onboarding programs for new hires when it comes to saving for retirement, maybe they should add “unboarding” programs as a bookend for those nearing retirement.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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