Data & Research April 22, 2008

Do People Really Spend Less in Retirement?

A newly released research study casts doubt on the traditional notion that calculations of a person’s retirement nest egg should take into account a post-retirement spending dropoff.
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RAND Corporation researchers Michael D. Hurd and Susann Rohwedder, in a project undertaken for the National Bureau of Economic Research, assert that spending in retirement only falls off by 1% to 6%, depending on the population group and how the falloff is measured, contrary to the often touted estimate that one needs 70% of pre-retirement income annually in retirement.

Hurd and Rohwedder contend that the spending decline seen in their analysis could be explained by:

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  • the end of daily work-related expenses such as for clothing and restaurant meals
  • a sudden health problem
  • having more available time to economize on one’s spending habits.

“The increased leisure can be used to purchase goods more efficiently or to substitute home-produced goods for purchased goods,” the authors write. “In this interpretation, spending declines, but actual consumption does not.”

Those in less wealthy population groups showed a spending decline which the researchers attributed to being forced to retire because of health issues.

Hurd and Rohwedder also cast aside the traditional contention among some retirement researchers that Americans are poor retirement planners and reach retirement age with inadequate resources. After they stop work, the theory has held, the now-retired Americans assess their financial situation and cut back spending in response.

“We found little support for an explanation based on a lack of forward-looking planning,” the two researchers wrote. “…For most workers, retirement is a predicable event, and workers should be assessing continuously their financial situation so that they will not be surprised. They should have saved enough so that they would not have to reduce consumption at retirement.”

The research report is available by subscription at http://www.nber.org/papers/w13929.

The Markets April 22, 2008

Participants Sticking With Managed Accounts

Financial Engines says that most plan participants who are automatically enrolled into the firm's managed account program stay with it.
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In fact, according to a press release, an average of 60% stayed with the program. Financial Engines also notes that automatic enrollment into managed accounts also had an effect on the overall health of the employer retirement plan.

The portfolios of participants that were automatically invested into managed accounts had higher expected growth rates after Financial Engines made allocation changes to their portfolios, according to the firm. On average, these allocation changes were projected to increase the expected annual growth of participant portfolios by 91 basis points annually, net of fees.

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In an evaluation of plan sponsors that implemented automatic investing for nearly 80,000 existing plan participants, Financial Engines found that 40% decided to manage their 401(k) accounts themselves after a personalized 60-day communication campaign. Participants who chose to manage their 401(k) accounts on their own tended to have higher salaries, higher balances and higher savings rates.

Participants remaining in the managed account program have an average age of 43, a median salary of $40,780 and are contributing an average of 6% of pay, with an average 401(k) balance of $33,048 and a median balance of $12,931. Comparatively, those declining auto-investment in managed accounts are older (average age of 46) with a higher median salary of $56,971, and are contributing 9%, leading them to have an average and median 401(k) balance of $76,804 and $36,150, respectively.

Of the 225,000 participants enrolled in the Financial Engines managed accounts program as of December 31, 2007, more than 20% were automatically invested.

As of March 31, 2008, the average annual account management fee that participants pay within these plans is 27 basis points – and, when combined with the underlying fund fees that these managed accounts members pay, the average total “all-in” fee is 63 basis points, according to Financial Engines.

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