Retirees Not Spending What They Draw Down

Retirees’ withdrawal rates from financial accounts are modest, and their spending is even lower, research from Vanguard finds. 

Among affluent retirees owning financial accounts, the median withdrawal rate was 3%, and the median spending rate was 1%. Vanguard focused on ten types of financial accounts in the study: individual retirement accounts (IRAs), employer-sponsored defined contribution (DC) plan accounts, annuities with a balance, cash-value life insurance, mutual fund accounts, brokerage accounts, money market accounts, certificates of deposit (CDs), and bank savings and checking accounts.                    

“What we showed is that even though people are getting these withdrawals, they are not spending them all. People are not spending down from financial accounts in retirement, they are saving them to grow,” Steve Utkus, principal and director of Vanguard Center for Retirement Research, in Malvern, Pennsylvania, tells PLANSPONSOR.

Utkus says when Vanguard first started its research, it assumed, as many financial planners do, that retirees look at all assets in all accounts and make a plan to draw down from all accounts. However, the research found four cornerstone accounts—DC plans, IRAs, mutual funds and brokerage accounts—are core financial accounts retirees consider as long-term holdings. Most liquid accounts—bank checking and savings accounts as well as money market accounts—have higher spending rates compared with the other types of financial accounts.

Utkus says there’s much debate about what is a sustainable withdrawal rate in retirement. “Some say it’s the classic 4% rule, but others, like Vanguard, say retirees can start that way but adjust the percentage based on market performance,” he notes. However, the research suggests that the discussion needs to shift to spending rather than withdrawal rates from financial accounts, in order to effectively measure the sustainability of savings in retirement.  

According to Utkus, the reason Vanguard specifically analyzed affluent retirees is it wanted to look at people trying to create a regular income stream. However, it would seem that lower income investors for whom Social Security would provide a higher income replacement rate in retirement would also not likely draw down regularly from financial accounts to spend. “But, we can’t say that for certain, since we didn’t focus on that group,” he notes.

Retirement plan sponsors that worry about participants cashing out and spending all their savings should know that’s not happening, Utkus suggests. He also notes that the era of spending from DC accounts and IRAs hasn’t yet happened. “The need to draw down from DC plans and IRAs will not happen in five years; it will be a gradual move to a total DC system,” Utkus says. 

Plan sponsors can refer participants to adviser services that will help them develop a draw down strategy, Utkus recommends. He also points out that advisers helping people set up income streams should realize that retirees are actually accumulating money in checking accounts, and they may need to reinvest those assets.

The Vanugard research report may be downloaded here.