Research conducted by the BlackRock Retirement Institute and the Employee Benefit Research Institute (EBRI) found that after nearly two decades of being retired, the average retiree still has 80% of their nest egg intact.
The researchers say this finding challenges long-held fears about retirees spending down their savings too fast. They also discovered that more than one-third of retirees continue to grow their assets late into life, “leaving considerable potential consumption on the table.” And for all of the talk about long-term care insurance, the researchers found that burdensome late in life out-of-pocket medical expenses are faced by only a small portion of retirees.
Despite all of this good news, BlackRock and EBRI say, retirement for future generations will be more challenging. The reason why retirees may be in such a strong position for the time being, they say, is because of changes to Social Security and Medicare, the fact that many of today’s retirees have pensions, strong performance by the stock market in recent years, and a healthy real estate market. The researchers found that after 18 years of retirement, the wealthiest group, those with $500,000 or more of savings, had retained 83% of their assets. But even those with $200,000 to less than $500,000 of savings had retained 77% of their assets, and those with less than $200,000 retained 80%.
“This supports prior research that suggests households tend to preserve retirement assets, with rates of returns on those assets often exceeding withdrawals,” the researchers explain in their report, “Spending in Retirement … Or Not?” As a result, “asset balances for many retirees grow through at least 85 years old.”
The report also found that among the highest, middle and lowest wealth groups, their income replacement ratios range from 60% to 70%. The research also found that retirees in all three income brackets lowered their spending the more years they were retired, with the highest wealth group showing the largest spending drop over time. The researchers said the decrease in spending is probably due to less money spent on transportation and entertainment as people age.
“It would appear that for most retirees, keeping up with the day-to-day expenses of retirement isn’t requiring them to dip into their retirement capital,” the report says.
The reason why retirees are being so frugal, the researchers say, is they are worried about long-term care and longevity. They might also want to leave an inheritance to a family member.
While 42% of the current retirees the researchers studied have a pension, fewer future retirees will be so lucky, they say. Social Security benefits may also be reduced, and future retirees who will rely more heavily on tax-qualified savings vehicles such as 401(k) plans will see their income cut by taxes, they add. Also, many experts do not expect the markets’ rates of return to be as strong in coming years, and people continue to live longer.
In conclusion, BlackRock and EBRI say, “shifting demographics and a more challenging market environment will only elevate the complexity and importance of helping retirees maximize the value of retirement savings.” If future retirees save more and work with an adviser, however, they can overcome these obstacles, the researchers say.
The “Spending in Retirement … Or Not?” report can be downloaded here.