Panel debates how to best give retirement clients ‘a license to spend’

Michael Finke and David Blanchett enjoy a symbiotic relationship as they jointly study retirement security issues. Their goals are in harmony. They bring different perspectives – Finke is an academic while Blanchett is managing director and head of retirement research for PGIM DC Solutions.

More importantly, both have parents struggling through the same issues they are advancing solutions for: financial insecurity in retirement.

Blanchett and Finke, professor and Frank M. Engle Chair of Economic Security Research at the American College of Financial Services, joined a panel discussion last week at the Alliance for Lifetime Income's 2024 Protected Retirement Summit.

They were joined on stage by Finke's mother Mary, the "inspiration" for her son's latest research, he said. Finke recalled Mary's early retirement when she lived on a pension and drove a "practical" Volkswagon station wagon.

But after an emissions scandal, Volkswagon bought back hundreds of thousands of its diesel-powered vehicles, including Mary's station wagon. Finke encouraged his mother to splurge and buy the Mercedes she had always wanted, but she disagreed.

"It would require spending more than she was getting in her pension," he said. "When you have these kind of big expenses that required her to dip into savings, she felt like it was different than spending money out of income. That created a lot of questions in my mind. What if she would have taken a portion of her savings and bought herself a lifetime income?"

A license to spend in retirement

Finke and Blanchett are frequent collaborators on retirement financial topics. Most recently, they co-authored the summer 2024 study, Guaranteed Income: A License to Spend, examining how Americans are far more likely to achieve their lifestyle goals in retirement through annuitized income, overcoming the uncertainty of life expectancy and the reluctance to spend down savings.

The study focuses on the challenge Americans face when determining how much they're able to spend from their investments each year in retirement – an inherently difficult task given that both the length of retirement and returns on assets are unknown. A retiree can either spend generously and risk outliving their savings or spend conservatively and miss out on the lifestyle they envisioned. A retiree who is concerned about outliving their savings will spend less.

Blanchett and Finke find that every $1 of assets converted to guaranteed income could result in roughly twice the equivalent spending compared to money left invested in a portfolio. This effect suggests that the explanation for underspending of non-annuitized savings among retirees is likely both a behavioral and a rational response to longevity risk.

Blanchett's parents are both retired career educators. After teaching for nearly three decades, they retired and still only spend their pension income, Blanchett said.

"I'll tell them, 'You can spend more than what you spend,' and they just don't want to do that," he said. "I think that this is maybe a better way to think about the value of lifetime income, which is it's going to help you enjoy your retirement more."

The survey of 2,051 Americans included in Blanchett's and Finke's analysis finds that 60% of respondents would feel more comfortable spending on nonessential activities such as going on vacation or eating dinner with friends in retirement if they received an additional $10,000 of income for life than if they had an additional $140,000 of retirement savings (40.6%).

The wealth amount represented the average cost of $10,000 of annuitized income at retirement. The increased willingness to spend from income was just as high among retirees who had saved $500,000 or more.

An attitude of privation

Mary Finke came to the United States from England in 1956. Her late husband immigrated from East Germany the same year. She described their lives growing up in post-war Europe and the attitude toward life activities viewed as frivolous.

"We both became used to privation, and it was against our nature at that point to participate in a profligate kind of lifestyle. We just didn't feel comfortable doing it," she explained. "I heard about people whose grandparents died and they went in the garage, and there were a whole lifetime of empty margarine containers. ... You kept pieces of string. You kept every single nail that you didn't use."

While retirees of the Great Depression era and even World War II are dwindling, it is that kind of experience that remains common to many retirees that advisors have as clients, Mary Finke said.

Alliance research indicates that a gap exists between what advisors tell clients about protected income and what those clients hear about it.

Those clients "are the sum total of their life experience, and you can suggest a certain way of living happier or enjoying their assets more," Mary Finke said. "But it really has to be a mind shift between how they've lived their whole lives and how you're opening up a door which they're very careful about walking through, and it's because of their background, I think in many cases."

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