Retirees Spend Lifetime Income, Not Savings

Abstract

The shift to defined contribution savings plans means that more retirees must fund spending from savings. Prior studies find that there appears to be a behavioral resistance to spending down savings after retirement in a manner that is consistent with life cycle models. We explore how lifetime income, wage income, capital income, qualified savings, and nonqualified savings are used to fund retirement spending. Retirees spend far more from lifetime income than other categories of wealth.  Approximately 80% of lifetime income is consumed, on average. In contrast, only about half of available savings and other income sources are consumed. Withdrawal rates from savings are well below typical guidance and the analysis suggests that converting savings into lifetime income could increase retirement consumption significantly, especially for married households. 

Keywords: Retirement, Retirement Income, Mental Accounting, Annuitization