How Rich People Live Poor Retirements

With so much focus on the plight of Americans who don't have enough money saved for retirement, there's another retirement crisis that isn't getting much attention.

Many asset-rich retirees decide to become income-poor, unwilling to spend their retirement portfolios. The question is why.

Two retirement experts from New York Life examined the behavior of these retirees at today's Retirement Industry Conference.

Research shows that many affluent retirees desire a higher quality of life but are unwilling to spend money to achieve it, said Nick Halen of New York Life.

Even when these retirees faced higher than expected expenses, only 22 percent drew down money from their savings, he said. Most retirees adjusted their budgets, matching their spending to their income, much as they had done during their working years.

Even if they had amassed a large retirement portfolio, most affluent retirees used pension, Social Security and dividend and interest income for living expenses, leaving their principal untouched, he said.

Behavioral economics provided some insight into this hesitation to spend in retirement:

1. Loss aversion - retirees view portfolio withdrawal as a loss.
2. Familiarity bias - retirees continue to follow the practice of not spending more than what they bring in.
3. Endowment effect - retirees become attached to their accumulated wealth.
4. Declinism - retirees are irrationally pessimistic about the future.
5. Mental accounting - retirees view principal as assets that cannot be spent.

Advisors must work with this group to form a strategy to make them more income-rich and less asset-rich.

Income annuities are one way to turn those assets into Income and give retirees the confidence to spend in retirement, said Claudel LaGuerre of New York Life.

“Retirees are spending less because they don't know what to do,” he said. “They need help turning assets to Income.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at Susan.Rupe@innfeedback.com. Follow her on Twitter @INNsusan.

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