Tuesday, August 22, 2023

Misleading Retirement Study

Ben Carlson says You Probably Need Less Money Than You Think for Retirement.  His “favorite research on this topic comes from an Employee Benefit Research Institute study in 2018 that analyzed the spending habits of retirees during their first two decades of retirement.”  Unfortunately, this study’s results aren’t what they appear to be.

The study results

Here are the main conclusions from this study:

  • Individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets.
  • Those with between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent.
  • Retirees with at least $500,000 immediately before retirement had spent down only 11.8 percent within the first 20 years of retirement at the median.
  • About one-third of all sampled retirees had increased their assets over the first 18 years of retirement.

The natural conclusion from these results is that retirees aren’t spending enough, or that they oversaved before retirement.  However, reading these results left me with some questions.  Fortunately, the study's author answered them clearly.

At what moment do we consider someone to be retired?

People’s lives are messy.  Couples don’t always retire at the same time, and some people continue to earn money after leaving their long-term careers.  This study measures retirement spending relative to the assets people have at the moment they retire.  Choosing this moment can make a big difference in measuring spending rates.

From the study:

Definition of Retirement: A primary worker is identified for each household. For couples, the spouse with higher Social Security earnings is the assigned primary worker as he/she has higher average lifetime earnings. Self-reported retirement (month and year) for the primary worker in 2014 (latest survey) is used as the retirement (month and year) for the household.
There is a lot to unpack here.  Let’s begin with the “self-reported retirement” date.  People who leave their long-term careers tend to think of themselves as retired, even if they continue to earn money in some way.  Depending on how much they continue to earn, it is reasonable for their retirement savings either to decline slowly or even increase until they stop earning money.  What first looks like underspending turns out to be reasonable in the sense of seeking smooth consumption over the years.

The next thing to look at is couples who retire at different times.  Consider the hypothetical couple Jim and Kate.  Jim is 6 years older than Kate, and he is deemed to be the “primary worker” according to this study’s definition.  Years ago, Jim left his insurance career and declared himself retired, but he built and repaired fences part time for 12 more years.  Kate worked for 8 years after Jim’s initial retirement.  

Their investments rose from $250,000 to $450,000 over those first 8 years of retirement, declined to $400,000 twelve years after retirement, and returned to $250,000 after 18 years.  Given the lifestyle Jim and Kate are living, this $250,000 amount is about right to cover their remaining years.  Although Jim and Kate have no problem spending their money sensibly, they and others like them skew the study’s results to make it seem like retirees don’t spend enough.

What is included in non-housing assets?

From the study:
Definition of Non-Housing Assets: Non-housing assets include any real estate other than primary residence; net value of vehicles owned; individual retirement accounts (IRAs), stocks and mutual funds, checking, savings and money market accounts, certificates of deposit (CDs), government savings bonds, Treasury bills, bonds and bond funds; and any other source of wealth minus all debt (such as consumer loans).
So cottages and winter homes count as non-housing assets.  This means that a large fraction of many people’s assets is a property that tends to appreciate in value.  Even if they spend down other assets, the rising property value will make it seem like they’re not spending enough.  It is perfectly reasonable for people to prefer to keep their cottages and winter homes rather than sell them and spend the money.  

Consider another hypothetical couple Ted and Mary who have generous pensions that cover their needs and wants.  Their only significant non-housing assets are a cash buffer of $25,000, and a nice trailer in Florida whose value rose from $40,000 when they retired to $200,000 18 years later.  By the methods used in this study, Ted and Mary appear to be continuing to save throughout retirement for no good reason.  In reality they’re not doing anything wrong.  Once again, people like Ted and Mary are skewing the study’s results.

What about an inheritance?

It’s not uncommon for retirees to receive an inheritance from a long-lived family member or close friend of the family.  When the amount of this inheritance is predictable, beneficiaries can account for it in their spending.  However, beneficiaries often don’t know much about when they will get money, how much they will get, or even if they will be named in the final will.  

It’s prudent for retirees to plan for the low end of a possible range.  When they finally get the inheritance, and it turns out to be more than they planned to receive, it might look like they’re underspending when we only compare their assets on retirement day to their assets two decades later.


It’s always possible for nitpickers to quibble with the methodology of any study.  However, it would make a material difference in this study’s results if we were to adjust its methodology to account for working income after retirement, cottages, winter homes, and inheritance.  The study’s conclusions don’t mean anything close to what they appear to mean.  They shed no light on whether retirees are spending reasonably.  We know that there are retirees who spend too much, others that spend well, and those who spend too little.  This study fails to tell us anything about the relative sizes of these three groups.


  1. We really need to get you and Fred Vettese in a room to debate this point about how much retirees spend vs. their working years. His reporting in the Globe and his books keep mentioning the point that 50% replacement rate is appropriate. Here’s his latest from yesterday I believe.


  2. His article last week.

    “ Assuming Joe has paid off his mortgage and no longer has child-raising expenses by age 60, his target income should be 50 per cent of his final average pay if he wants to maintain the same standard of living in retirement. (Note that all percentages shown here exclude the OAS pension.)”

    1. Hi Larry,

      Fred and I don't disagree on that point. It's true that family expenses drop way down from peak spending on mortgage etc. to being retired. I've experienced this myself. Of course, not everyone has kids or owns a home, so we have to take into account our own circumstances. On average, the 70% income replacement figure we've used for a long time is too high for most people (but not everyone).

      However, none of this has any bearing on the study I examined in this article. The question here is whether people are spending too little from their retirement savings. This study provides no useful answer to this question.

    2. I do disagree with Fred. I expect that I would need more for three reasons: (1) don't own a home, my spending will be higher due to (2) renting/inflation and since my spending is higher my (3) taxes are going to be higher. Hence I believe I will be spending more not less in retirement.

    3. Hi Eccentric Rogue,

      Technically, you're not so much disagreeing with Fred as your situation is different from the typical. Fred is still right that the average person doesn't need to replace 70% of working income, but your case is an outlier.

  3. I see your point. Thanks for clarifying.

  4. Michael, how are deciding how much of your net worth you will give to your children when they are younger vs your estate when you and your wife die? I’m struggling with this after witnessing my parents have simultaneous health crises and go through $300K in a couple of years. They are both in government LTC with extra support which is far cheaper but less than ideal and unavoidable considering they are not multi millionaires and have complex needs.

    1. I must have missed this question when it came in. I don't have a fully cemented plan for giving to my sons. I've started slowly and have taken it one year at a time. I'm afraid I don't have good answers for a question like this that requires a long-term view.

  5. "I must have missed this question when it came in. I don't have a fully cemented plan for giving to my sons. I've started slowly and have taken it one year at a time. I'm afraid I don't have good answers for a question like this that requires a long-term view."

    I wouldn't mind an update on this Michael if you have more details. Currently in a similar situation.

    1. I've started with helping with student loans and funding FHSA accounts. I haven't decided what to do next.