Saved enough to retire? Think again
The retirement party just got canceled.
Most of us aren’t saving enough for retirement — and we aren’t anxious to abandon our spendthrift ways. That may explain the giddy reception accorded a 2005 study, which found that retirement could prove less expensive than we imagine, because most of us will choose to cut back our spending in our 70s.
No doubt about it, it’s an intriguing idea. There’s just one problem: The study is flawed.
At issue is a June 2005 Journal of Financial Planning article by Ty Bernicke, a financial planner in Eau Claire, Wis.
The study examined government data and found that, as folks got older, their spending declined but their wealth increased. That suggests that retirees voluntarily cut back their spending.
“With my clients, I tend to see a spike in travel expenses early in retirement,” Bernicke says. “That tends to get old for most people pretty quickly. By the time they are age 75, they aren’t inclined to travel as much or play golf as much.”
Since it appeared, Bernicke’s study has been discussed in a host of magazines and newspapers. “Financial planner to retirees: Loosen up,” trumpeted one newspaper headline. “Are you saving too much for retirement?” asked another newspaper.
Saving too much? Trust me: For most of us, that just isn’t a risk.
Yes, we do spend less later in retirement. According to a 2005 study put out by the Urban Institute in Washington, folks age 75 and older typically spend 10 percent less per person than those age 65 to 74.
But this drop in spending doesn’t seem to be entirely voluntary. To prove that older retirees are wealthier, Bernicke’s study cites 2000 U.S. Census Bureau data for five income quintiles.
At first glance, the results appear to show Americans getting richer as they grow older. Take households that fall into the bottom 20 percent of income: The typical net worth is $32,000 for those age 65 to 69, $43,230 for those 70 to 74 and $46,266 for those 75 and older.
Trouble is, the data are distorted because of the way the quintiles are created. You might presume that 20 percent of each age group falls into each quintile and thus you’re getting an apples-to-apples comparison. But in fact, the income cutoff for these quintiles is based on the range of income for the entire population.
In other words, no matter what your age, you will be listed as falling into the bottom quintile if your annual income is $15,648 or below. Result: 43 percent of households age 75 and up find themselves in the bottom 20 percent of income, versus 31 percent of those 70 to 74 and 27 percent of those 65 to 69. It just isn’t valid to compare the median wealth for these odd-size slices of the population.
When I brought this to Bernicke’s attention, he acknowledged the problem. “The way (the census data are) published is extremely confusing,” he said, adding that he plans to research the issue further.
Where does that leave us? Fortunately, the Census Bureau also lists the median wealth for all households in each age group. And that shows that households headed by someone age 75 and older aren’t richer. These seniors have a typical household net worth of $100,100, versus $120,000 for those 70 to 74 and $114,050 for those 65 to 69.
Moreover, for seniors — especially those age 75 and up — home equity is a huge part of their net worth. If you ignore home equity, households headed by someone age 75 and older have a typical net worth of just $19,025.
The reality: Most older Americans don’t have much financial room for maneuver — and if they’re spending less, it probably isn’t out of choice.
“The question shouldn’t be, ‘Do older retirees spend less?’ ” says Henry Hebeler, a retired Boeing executive who runs www.analyzenow.com, a Web site devoted to retirement issues. “The question should be, ‘Why do retirees spend less?’ They spend less because they don’t have the money.”
But even if you are lucky enough to have a plump nest egg, don’t go overboard on spending early in retirement. Why not? First, retirees’ cost of living tends to climb faster than the general inflation rate, so you may face surprisingly steep costs later in retirement. Second, instead of the expected decline, your expenses could soar because you are hit with nursing-home or home-care costs. Third, you might live a surprisingly long time.
“I work with people at our church who are age 80,” Hebeler says. “At age 65, they thought they’d be dead by now. The reason they’re at home watching TV is because they can’t afford to spend anything.”