Socking Too Much Away
Forget the common assumption. Some people may be saving more than they will need for their golden years
Over the years, financial adviser Richard Ferri has seen a few clients go to that great retirement community in the sky. And they have all left behind something: money. Lots of it. "We've never had a client die with less money than they retired with," says Ferri, who works in Troy, Mich. "If they retire with $2 million, they end up with $4 million. The value of the account goes up more than they anticipated, and they don't spend as much as they thought they were going to spend."
In fact, Ferri suspects a lot of wealthy Americans actually oversave for retirement and "become overly concerned with putting money away." In an era of high anxiety about retirement finances, the idea that some workers are socking away more than they need is counterintuitive. But a widely debated study suggests Ferri may be right.
In a report published in the Journal of Financial Planning last year, Eau Claire, Wis., financial planner Ty Bernicke examined federal statistics and discovered an assumption-bursting fact: Seniors actually go through less money as they get older. By contrast, many financial advisers figure that retirees will spend at the same rate until they die, and they rely on this conventional wisdom in crunching numbers.
Nonsavers. How many people are oversaving for retirement? Experts agree that it's probably a fairly small number. After all, American saving rates are low, and many young people aren't taking full advantage of 401(k)'s at the workplace. Indeed, fewer than a third of current workers say they and their spouses have saved more than $50,000 for retirement, according to a new survey by the Employee Benefit Research Institute.
Still, Bernicke's study suggests that retirement savings may last longer than many people think. According to Bernicke, a typical household whose residents are over 75 spent $25,763 in 2004. Back in 1984, that same household would have spent $43,000 in inflation-adjusted dollars. Seniors "tend to be more active in their early years and less active in their later years," Bernicke says. "Their spending goes down." Yes, retirees often blow out their savings on expensive vacations and hobbies shortly after they stop working. And they often spoil their grandchildren and bail out their own kids when they need help. But then they start to slow down, Bernicke says, and stop driving and traveling as much. As a result, older retirees need less money to get by.
Bernicke says that the grow-old-and-spend-less principle applies to retirees across the board, suggesting that baby boomers won't be exempt. "Every generation decreases spending dramatically as age increases throughout retirement," Bernicke writes. Could this be because seniors simply run out of money to spend? Not so, reported Bernicke, who found that the average net worth of American seniors actually grows as they get older.
Taking Bernicke's theory into account can make a big difference in retirement planning. Under one traditional prediction model, a couple who spend $60,000 a year and have $800,000 in 401(k) savings at age 55 would have only a 13 percent chance of having enough money to make it to age 85, assuming that their spending habits remained constant. But the chances of success--making it to age 85 with enough money--jump to an impressive 100 percent when the model assumes that the couple will spend less over time.
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