A recent series in the Wall Street Journal has highlighted the challenges retirees have not only leading up to retirement, but when their lifestyle changes upon retirement.
The series emphasized that good money habits can lead to a higher asset level and income in retirement, but sometimes those good money habits prevent the retirees from spending the extra money.
An article by Meir Statman, Professor of Finance at Santa Clara University and a well-known and respected author on personal finance, covered those good habits and how they can turn against you. Professor Statman notes that conscientiousness is a double-edged sword. Conscientiousness is a personality trait that is closely related to academic achievement, job performance and other good behaviors. He also notes that conscientious people accumulate more wealth than those less conscientious. But that terrific trait can collide with retirement spending, as people who tend to be frugal have a tough time changing their habits even with more than adequate resources available to them.
Many retirees spent their working careers setting automatic transfers from their “income mental accounts” like wages to “capital mental accounts” like 401(k) accounts and savings. In retirement many people can’t reverse those mental accounts as they deem it to be “dipping into capital”. Dr. Statman suggests a couple of ways to comfort oneself-using managed payout funds that may pay out 4% or so each year, or use the government mandated withdrawals from retirement account (RMDs) as a prescription for how much of your portfolio you can use each year.
Dr. Shlomo Benartzi of the UCLA Anderson School of Management wrote about comparing retirement planning to eating chocolate. He says, in both cases, you’re trying to maximize the pleasure of a scarce resource. He suggested that research shows that people feel happier when rewards they receive increase over time, starting low and progressively getting better. That conflicts with many retirement income plans that call for a static monthly income.
So, if figuring out your cash flow in retirement isn’t hard enough, another piece in the Journal covered actual retirees and the surprises they experienced upon retirement. Many recent retirees were happy to report their income and savings were holding up, but some of their costs were higher than expected-especially Medicare premiums. Most responders to a survey the Journal held said they are enjoying retirement even if it is wasn’t what they expected. And their expenses didn’t go down right away, as they have more time and expenses seem to follow the need to fill in the time.
Many in the survey reported happiness that their pre-retirement good habits paid off, especially getting out of debt.
Retirement planning includes many topics in addition to investment planning, and this recent research discovered how important all of the other areas are to happiness in the so-called “Golden Years”.