I spend a lot of time with retirees about their spending plans. Most of them proudly tell me that they spend much less than the 3%-4% initial withdrawal amount that is often locked in terms of safe spending rates. They tell me they are good keepers, they are reciprocating, they don’t need more. It seems to be part of their identity.
These are all commendable things. But they make me think about the trade-off between less consumption and the potential for residual amounts at the end of life. The truth is that less spending leads to bigger remaining balances when you look at our retirement income research.
Even retirees who spend according to our “base case,” which means taking 3.9% initially in 2025 and adjusting for inflation each year thereafter, will have a significant remaining balance after 30 years of withdrawal. For example, for people starting retirement with $1 million, withdrawing $39,000 (3.9% of the balance) initially, and inflation-adjusting that dollar amount for the next 30 years, the median ending balance was nearly $2 million for a balanced portfolio and even higher for a more equity-heavy portfolio.
Of course, leaving a significant remaining balance is not a bad outcome. These funds are usually inherited by children, grandchildren, charities, or other loved ones who can put the money to better use. And many retirees are quite reasonably concerned about facing huge long-term care costs later in life; For people who don’t have long-term care insurance or a separate fund for long-term care, downsizing may be a reasonable thing to do and may provide peace of mind.
But as Mike Piper points out in his excellent book “More Than Enough,” giving small gifts to loved ones early in their lives may be a better strategy than leaving assets after death.
The average age of someone who inherits money is 51, and more than a quarter of people who inherit wealth are over 61. At this stage of life, this inheritance can certainly be used to improve retirement security for the heir.
But by the time we reach our 50s and 60s, our life path is often well established. The average inheritance of $69,000 reported in the 2022 Survey of Consumer Finances is just a fraction of what someone needs to pay for retirement. At the same time, a small gift in advance, to help pay off a house payment or student loans, may make a big difference by helping a young loved one achieve their financial sustainability.
And it goes without saying that your money is put to better use in your own life after your death. That’s what my parents did in 1994 when they helped us with a down payment. This initial gift from them meant much more to my husband and me than the inheritance we received from them at the end of their lives, although the latter was a significantly larger amount.
Retirement income
