Conventional Wisdom About How People Spend in Their Golden Years Needs to Be Retired

Research by T. Rowe Price shows that, in contrast to conventional wisdom, spending in retirement varies according to an individual’s savings preference and net worth. These findings can help financial professionals to better understand each client and offer tailored investment solutions to help meet their needs.

Thirty percent of retirees can be classified as spenders, drawing down their asset balance to maintain spending when no longer working. Despite being in the minority, these individuals represent the conventional understanding of financial behavior in retirement. The remaining 70% of retirees–the savers–act differently, adjusting their spending to maintain their balance.

What leads some people to maintain their asset balance while others draw theirs down?

1. Rational goals: These include saving for something in particular (e.g., end-of-life medical costs) or leaving money to their children.
2. Psychological goals: Savers may derive enjoyment from the balance itself or use the balance to assess how they’re doing—individually or in comparison to others—or it may increase their sense of financial well-being and life satisfaction.
3. Behavioral goals: Some people are natural savers, and this relationship with money continues into retirement. They’re inclined to moderate their spending and may be conscientious about their balance.

Research shows that the typical retiree increases their spending by two percentage points less than the rate of inflation each year. Over time, this can significantly impact a household’s expenditures and net worth.

This compelling research presents an opportunity to deepen relationships with–and offer new solutions for–an increasingly important client segment.

Start by finding out which of your clients are spenders or savers by having them complete our spender/saver worksheet. High-net-worth individuals, for example, tend to exhibit strong saver behavior, increasing their spending by even less than the average retiree. Take time to review the answers with your clients and use the findings to develop customized strategies that help them feel understood–and encourage loyalty to your practice in the process.