How to switch from saving to spending mode
Lori Lucas, CEO of the Employee Benefit Research Institute, discusses how to make the switch from saving to spending.
Q: How can retirees feel more at ease about making the transition from having money coming in to having money go out?
A: We found that people feel more comfortable spending from steady sources of income rather than tapping their nest egg. So if you don’t receive something like a traditional pension, you can create a regular “spending paycheck” for yourself by figuring out how much you need each month and having that amount automatically transferred from your savings to your checking account.
Q: Anything else?
A: There’s also a behavioral element. “Sticker shock” is common among new retirees when they first face potential expenses in retirement. But think about how your retirement is going to play out over time. As you go through the phases of retirement, you’re likely to be spending more time with family and friends, which is not as ambitious or expensive. Day one is going to look a lot different from five, 10 or 15 years in.
Q: With traditional pensions becoming less common, are there other ways to create a steady stream of income?
A: Employers can help their workers translate their pool of defined-contribution money into a pension-like experience. For example, they could introduce target-date funds with a decumulation glide path that lets retirees spend down their assets, or stable-value funds, or competitively priced, low-commission annuities. One challenge is overcoming the psychological barrier and helping people feel comfortable about committing to an annuity. This may be the largest amount of money they have ever seen at one time, and they feel disappointed by how much they actually get in payments.
Q: What are your concerns about those retirees who say they are struggling financially?
A: They are more likely to have unmanageable debt, which appears to be a key contributor to their anxiety, lack of satisfaction and low standard of living. They’re in a very tough position because they can’t adjust their spending. They might have been expected to delay their retirement, but it’s possible they were forced to retire because of illness or some other factor.
Q: How can employers help?
A: They should consider workplace-based debt-management programs for both retirees and pre-retirees. In addition to investments that provide a steady income stream, they could also offer retirees access to financial advice. The traditional role of an adviser is not only to give guidance on investments but also to reinforce retirees’ plans, help them understand whether they are on track, and address issues such as long-term care needs. There is an important element of hand-holding.