Guaranteed income gives retirees confidence to spend, study finds

The study reveals a strong correlation between guaranteed income and higher spending levels in retirement. Retirees who hold a greater share of their wealth in guaranteed income sources, such as pensions or annuities, tend to spend more each year compared to those who rely primarily on investment assets.

This finding challenges the conventional wisdom that simply accumulating a large nest egg is sufficient for a comfortable retirement. Instead, it suggests that the form of wealth matters just as much as the total amount. Guaranteed income appears to provide retirees with a greater sense of financial security, allowing them to spend more freely without the fear of depleting their assets.

The research indicates that for every dollar of assets converted to guaranteed income, retirees could potentially double their equivalent spending compared to leaving that money invested in a portfolio. This significant difference in spending behavior highlights the importance of considering guaranteed income sources when planning for retirement.

Based on the study's findings, several strategies emerge for maximizing retirement income and spending. They include:

• Delay Social Security claiming. By postponing Social Security benefits, retirees can increase their guaranteed income stream for life.
• Consider employer pensions. If available, choosing a job with a pension plan can provide a valuable source of guaranteed income in retirement.
• Explore income annuities. Purchasing an income annuity can convert a portion of savings into a guaranteed lifetime income stream.
• Balanced approach. Maintain a mix of guaranteed income sources and investment assets to provide both security and flexibility.
• Reevaluate spending habits. Recognize that guaranteed income may allow for higher spending levels without jeopardizing long-term financial security.

These strategies align with the study's conclusion that retirees could potentially spend twice as much each year by shifting non-annuitized wealth into annuitized wealth. However, it's important to note that individual circumstances vary, and consulting with a financial professional is recommended when making significant retirement planning decisions.

The study sheds light on a common phenomenon known as the "retirement consumption puzzle," where retirees tend to spend less than their financial resources would allow. Several factors contribute to this behavior:

• Longevity risk. Fear of outliving one's savings can lead to overly conservative spending habits.
• Behavioral biases. Retirees may feel an emotional resistance to seeing their nest egg shrink, even if it was saved for retirement spending.
• Separate mental accounting. Individuals tend to view income and assets separately, making them more likely to spend from income rather than drawing down investments.
• Health concerns. Anticipation of potential future medical expenses may lead to precautionary saving.
• Lack of “license to spend.” Without the structure of guaranteed income, retirees may struggle to determine safe spending levels.

The research suggests that by increasing the share of wealth allocated to annuitized income, retirees may be able to overcome some of these behavioral barriers and achieve their desired lifestyle goals more effectively.

The study's findings indicate that the composition of retirement wealth plays a crucial role in determining financial security and spending behavior. Retirees with a higher proportion of guaranteed income tend to feel more secure and spend more freely compared to those with primarily investment-based wealth.

This difference in behavior persists even when the total wealth is equivalent, suggesting that the form of wealth, not just the amount, influences retirement outcomes. Guaranteed income sources provide a stable foundation for retirement spending, reducing the anxiety associated with market volatility and longevity risk.

Moreover, the research implies that retirees could potentially improve their financial security by converting a portion of their investment assets into guaranteed income streams. This strategy could help bridge the gap between potential and actual spending, leading to a more satisfying retirement experience.

The study's findings highlight the potential benefits of annuities in retirement planning. While few retirees currently purchase financial products that provide lifetime income guarantees, the research suggests that doing so could significantly impact retirement spending and satisfaction.

Annuities can serve several important functions in a retirement plan:

• Longevity protection. They provide income for life, regardless of how long one lives.
• Spending clarity. Annuities offer a clear structure for safe withdrawal rates.
• Behavioral benefits. They may help overcome the reluctance to spend down savings.
• Risk management. Annuities can reduce exposure to market volatility and sequence of returns risk.
• Income efficiency. The study suggests that annuitized wealth generates about twice the spending as non-annuitized wealth.

Despite these potential advantages, the "annuity puzzle" persists, with relatively low adoption rates among retirees. The study attributes this partly to behavioral barriers caused by framing wealth separately from income. Financial professionals may play a crucial role in helping clients understand the benefits of annuitization and overcome these psychological hurdles.

The research by Blanchett and Finke provides valuable insights into retirement spending behavior and the impact of guaranteed income on retiree financial security. Their findings challenge traditional approaches to retirement planning and suggest that a greater focus on guaranteed income sources could lead to improved outcomes for retirees.

For individuals approaching or in retirement, these insights underscore the importance of carefully considering the composition of retirement wealth, not just the total amount saved. Strategies that incorporate guaranteed income sources, such as delaying Social Security, exploring pension options or purchasing annuities, may lead to higher spending levels and greater peace of mind in retirement.

Financial professionals and policymakers should take note of these findings as well. The study suggests that current practices may be leading to suboptimal outcomes for many retirees, with significant amounts of wealth left unspent at the end of life. By helping clients increase their guaranteed income streams, they could potentially improve retiree welfare and satisfaction.

As the retirement landscape continues to evolve, with fewer workers having access to traditional pension plans, the insights from this study become increasingly relevant. They point to the need for innovative financial products and strategies that can help retirees convert their savings into sustainable, lifelong income streams.

Ultimately, the goal of retirement planning is not just to accumulate wealth, but to ensure a comfortable and secure lifestyle throughout one's later years. By understanding the relationship between guaranteed income and spending behavior, retirees can make more informed decisions about how to structure their retirement wealth for maximum benefit and enjoyment.