For years, the retirement industry has been obsessed with one key problem: people aren’t saving enough. Now, “suddenly,” we have another.
Retirees aren’t spending “enough.”
There’s a certain irony in that. After decades of urging discipline, restraint, and delayed gratification, we’re now concerned that retirees are too disciplined — that they’re depriving themselves of the very retirement they spent a lifetime preparing for.
And once the paycheck stops, that question gets very real, very fast.
Because while you can model returns, you can’t model life. Inflation, healthcare costs, longevity—those aren’t just variables, they’re uncertainties. So yes, retirees tend to be cautious. Frankly, it would be surprising if they weren’t.
That hasn’t quieted a growing chorus worrying that retirees are being too cautious— “hoarding” assets out of fear they’ll run out of money before they run out of…life.
Distribution Defaults
There’s some data behind that concern. The Employee Benefit Research Institute has long documented the extent to which retirees rely on required minimum distributions (RMDs). They don’t withdraw until they have to, and when they do, they tend to take …about what’s required. The RMD doesn’t just trigger withdrawals—it effectively defines them. Like it or not, the IRS life expectancy tables have become the default decumulation strategy.
And then there’s the work of David Blanchett and Michael Finke, which suggests retirees are far more comfortable spending income than they are dipping into savings. Frame it as income, and people spend it. Frame it as an asset, and they preserve it. Hence, the now-popular notion of a “license to spend.”
Now, I get it. As someone now in retirement (though not yet subject to RMDs), I’ve done the math. The 4% rule, the RMD tables, the various projections—all of them, in one way or another, are trying to answer the same question: how do I make this last? And how do I do that not just for me, but for my wife — who, actuarially speaking, is likely to outlive me?
As we approached retirement, we focused on two things: what we were spending (admittedly, figuring out retirement expenses is easier the closer you are to retirement), and what income we could count on. Social Security for both of us (for the moment, anyway), plus a couple of modest partial pensions, gave us something important—not just income, but reliable income. Enough to cover the basics of our chosen lifestyle. And yes, we spend that money just like we spent our pre-retirement paychecks.
What we didn’t do was annuitize the rest of our savings.
Puzzle Pieces
And that’s where some of this current messaging starts to feel …binary. Maybe that’s not the intent, but it’s often how it comes across: if income is good, more must be better—and converting a big chunk (or all) of your savings into an annuity is the logical next step.
And yet, even when the option is available, most still …don’t.
This is what the academics label the annuity “puzzle” – the continued reluctance of American workers to embrace annuities as a distribution option for their retirement savings. It’s an academic headscratcher because they tend to assume workers are “rational” when it comes to complex financial decisions, specifically because “rational choice theory” suggests that at the onset of retirement, individuals will be drawn to annuities because they provide a steady stream of income and address the risk of outliving their income.
Human beings are, in fact, mostly rational (academics not always so much) – and, despite record annuity sales (outside of retirement plans) most human beings (still) can’t quite get their arms around the notion of handing the biggest sum of money they’ve ever seen over to an insurance company …which will then “dribble” it back to them in considerably smaller sums each month, albeit for the rest of their lives.
The industry’s current “solution”? If they won’t buy it on their own – and if plan fiduciaries are (still) hesitant to put it on the menu – well, let’s default them into it - by embedding it in a target-date fund or managed account. Now, honestly, if a target-date fund is a “blunt” asset allocation instrument, how is defaulting participants with a myriad of personal financial and physical circumstances, retirement needs, and health concerns any less so?
Look, reliable lifetime income is valuable. In many cases, invaluable. It is the baseline for a successful retirement financial plan. But so is flexibility. So is liquidity. So is the ability to respond to whatever retirement actually throws your way. Things that the limits of “regular” lifetime income won’t address.
So, maybe don’t assume that the only way to give retirees a “license to spend” is to ask them to hand over the keys to the entire portfolio – certainly via a default mechanism they likely never really understood or appreciated.
And if that’s not what’s being suggested—if the intent is really about partial solutions, flexibility, and choice—then perhaps the messaging could use a little more clarity.
Because if I’m hearing it the other way, I’m probably not the only one.
— Nevin E. Adams, JD
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