Steve Utkus is a retirement expert at Vanguard. He discusses research based on the savings and spending patterns between investors using more traditional sources of income during retirement--folks who were relying primarily on Social Security and pension to fund their living expenses--as well as what you called "new retirees," who were relying primarily on their portfolios, in addition to Social Security.
In this interview, he discusses his findings with Christine Benz, Morningstar’s director of personal finance. Below is an excerpt from the conversation. To watch the video or read the entire interview, click here.
- People, particularly in the early years of retirement, continue to save as well as spend.
So, the model we all have in our heads is to save during the accumulation years, and when we get to retirement, we want an income that we're going to spend. But it turns out--and this has been true in other academic studies, but this is really the first industry study to confirm it--even retirees in the early years of retirement are actually saving a portion of the income. And we were looking at people through 80. So, it's not about only spending when you get to 65 or whenever you retire, it's actually about how you spend and save.
- The savings patterns revealed that traditional retirees had a propensity to spend a bit more than the new retirees.
It could be that people with more guaranteed income feel more secure because they have that regular guaranteed income and are willing to spend a bit more rather than save it.
The other difference just could be the time and the period--people being cautious. They're just saving more in general in both groups.
There are a lot of potential explanations for this behaviour, but really the topline finding is this notion that the standard model in our heads in which you get to retirement and you spend every bit of income you get is not the case; people are actually saving it.
Now, why might they be saving it?
They're just buffering their living expenses because down the road they might need the money, or they might be worried about long-term healthcare costs, or they just might be worried about uncertainty in the markets or in their future. So, there are a lot of motivations for continuing to save.
Our research actually focused on more affluent households who had $100,000 in savings of any type, and that gives us a somewhat more affluent group, because obviously that was the minimum. The average financial-asset portfolio was closer to half a million dollars. So, we were looking at an affluent group, but the whole point was that even among this group, the notion that savings is something you do when you're 75 rather than just spending the income you have was an important finding.
- The wealthier segments of this population did have a higher propensity to save.
The very, very affluent had really high, six-figure retirement incomes. So, that was definitely the case. We do see that general pattern. But take this simple example: There are a number of people who rely almost exclusively on Social Security and pensions as their main income source, and yet they save a portion of it. Even though it's guaranteed for life and will come in every month, they do have this propensity to save across the board. As income grows, their savings rate is even higher.
- Retirees prefer secure assets.
If you look at this group of retirees, which is an affluent group, and you add up all the Social Security--think of it as a lump-sum wealth value--and the pensions and all the money they have in conservative investments (in money market funds, in bank CDs, in short-term reserves), you're just stunned by the level of "secure assets" they hold.
This is something we've noticed in general in some of our financial-planning units--that affluent households end up with lots of cash.
Why might that be?
One reason, of course, is that people just hold large reserves because they want to buffer multiple years' worth of expenses. There's financial security from having multiple years' worth of living expenses in a cash buffer. But it could also be worries about the markets and market outlook, and it also could be thinking about longer-term expenses for healthcare.
- Retirees have a healthy mix of basic and discretionary expenses.
We had people classify their spending by various basic categories, like housing and utilities and so forth, and then discretionary, like travel or dining out and so forth and a whole range of other expenses. Interestingly enough, as you'd expect, the higher your income, the more likely you are to have discretionary expenses--that was pretty obvious. But as a general rule, given the group that we were looking at, there was a pretty healthy mix of both basic and discretionary expenses throughout the age groups. And again, I emphasize that our research really focused on this more affluent group.
The reason why we were interested in this group is, of course, that they have the pools of savings that could be used to generate income. If you have $10,000 in the bank, you're not thinking of using that as an income stream in retirement. But we thought if you had $100,000 or more in financial savings, you'd begin to think of that less as some money you could use in an emergency and more as an ongoing potential source of income. That's why we focused on these more affluent households.
