Spend "Thrift"

Having now lived in our new home long enough for most of the extraordinary expenses to emerge, and for the costs of living in a different place to become “normal,” my wife and I recently sat down with a financial planner to update our retirement plan(s). Having gathered the requisite documents regarding retirement savings, insurance, wills, and investments, we turned to our current budget and spending patterns.

Retirement remains a relatively distant goal—but we are at a point in our lives where we can see the end of certain expenses (college tuition for the kids, the mortgage on the house), and the need for different, and potentially higher, levels of expenditure on others (insurance, long-term care). And, while we’ve long done budgets, established goals, and set aside funds to meet long-term objectives, retirement planning—as those who have undertaken to do so can attest—takes that focus to a whole new level, as you begin to take into account different sources of income, as well as expenses.

A recent EBRI Issue Brief (see “Income Composition, Income Trends, and Income Shortfalls of Older Households,” online here) examined the trends in income and spending among older American households. Not surprisingly, for all age groups above 65, Social Security remains the primary source of income, and by significant amounts. Consider that in 2009, households ages 65–74 and households with members age 85 or above received 54 percent and 66 percent of their total household incomes, respectively, from Social Security benefits. Moreover, the proportionate importance of Social Security income increases with age.

Additionally, income from pensions and annuities (including distributions from IRAs) is the second-largest source of income for older households. In 2009, households ages 65–74 received 17.1 percent and households above age 85 received 15.3 percent of their incomes from pensions and annuities.

As you might expect, the sources of income, and their proportionate contributions, varied over time—but the report noted that more than half (about 60 percent) of elderly American households do not yet appear to be “decumulating,” in that they spent less than their incomes. On the other hand, there were some—in 2009 more than 14 percent of older households—who spent considerably more than their income: 175 percent, in fact. Of some concern, the EBRI report noted that households that face income shortfalls not only tend to have much lower levels of assets, they spend down their liquid assets at a faster rate than households with no income shortfalls.

We should expect to spend more than we “make” (in the form of new income) in retirement. That’s why reliable “new” income sources in retirement, whether Social Security or pensions, systematic withdrawals from 401(k)s or IRAs, are so important, especially as “old” sources (such as that regular payroll check) fade away—certainly if you don’t want to run out of retirement income before you run out of retirement.

- Nevin E. Adams, JD