Are We Spending Too Little in Retirement?

Abstract

The drumbeat of “retirement crisis” is much too loud. Madamba and Utkus (2017) reported that 55 percent of retirees believe there is a national retirement crisis, but only 4 percent describe their own retirement situation as a crisis. They also reported that 90 percent of recent retirees are able to spend freely, within reason, or cover needs with some discretionary spending; only 10 percent said that they are on a strict budget.

Concern about running out of money is regularly exaggerated in inflated estimates of life-expectancy. Social Security tables indicate that, on average, only one in 10 of today’s 65-year-old men will live to age 95. Moreover, as reported by Vettese (2016) older people spend less, in large part because physical limitations make them less able to spend and because they are less inclined to spend for personal reasons. Spending at age 84, adjusted for inflation, is 23 percent less than it was at age 62 among college-educated American couples. Spending on movies, theatre, opera, and concerts declines by more than 50 percent between the ages of 60 and 80. Spending on hearing aids, nursing homes, and funeral expenses increases by more than 50 percent.

We tackle the saving and spending task with the mental tools of framing, mental accounting, and self-control, as described by Thaler and Shefrin (1981), Shefrin and Thaler (1988), and Shefrin and Statman (1984). We frame our money into distinct mental accounts, mainly “capital” and “income,” and set self-control rules of saving and spending. Self-control tools include the rule of “spend income but don’t dip into capital.”

Self-control is not easy to muster and some fail to muster it at all. Yet self-control can be excessive. Indeed, excessive self-control is as prevalent as insufficient self-control. Excessive self-control is evident in the tendency to spend less today than our ideal level of spending, driving tightwads to extremes beyond frugality.

We need not feel guilty about spending our hard-earned savings on ourselves. And if we derive no pleasure from spending on ourselves, why not spend on family and the needy in our communities and beyond them? It is better to give with a warm hand than with a cold one.

Keywords: behavioral finance, financial advisers, retirement saving, retirement spending, retirement crisis, framing, mental accounting, self-control

JEL Classification: G02