How to enjoy your retirement savings and avoid FORO

The psychiatrist had spent decades decoding the human mind—so why was his own retirement planning such a brain-twister? When he first walked into his TIAA Wealth Management advisor’s office seven years ago, he carried with him a dog-eared notepad documenting every dollar he and his wife spent each day. Even his wife’s garden worried him—he called it “putting dollars in the ground.” The shocking part? The couple had saved $8 million for retirement, yet he was paralyzed by the fear they’d run out of money.

The couple wanted to ensure that their four adult daughters, one of whom had special needs, were taken care of, but they felt too constrained to be able to spend confidently on themselves. The same discipline that made the psychiatrist and his wife successful savers became a barrier to enjoying their lives in retirement.

They’re not alone. Whether driven by fear of running out (FORO) or the common psychological tendency to treat certain accounts as off-limits,¹ research consistently shows that retirees underspend their savings—missing out on the lifestyle they spent their lives working toward.

“Nearly half of my clients struggle to spend confidently in retirement, hampered by the fear of spending, despite having more-than-adequate assets,” says the psychiatrist’s advisor, Michelle Patello, TIAA vice president wealth management advisor. Patello says this fear of overspending is especially common among baby boomers, whose parents lived through the Great Depression or were part of the early Silent Generation.

Baby boomers are a generation that learned to keep their heads down, work hard, save, and survive. Suddenly, they have more money than they need, but it’s difficult for them to turn off the saving switch and turn on the spending one.

One leading culprit of FORO is the reality that retirees are living longer, which leads to greater health care expenses over longer periods of time. A 67-year-old retiree today has a 25% chance of living to age 95 and a 10% chance of making it to 100, according to research from the TIAA Institute.² While some relish the thought of more time with family, no one wants to become a financial burden.

Another contributor to underspending in retirement is the psychological notion that some accounts are for spending and others shouldn’t be touched. Retirees are comfortable spending wealth from guaranteed income (Social Security, pensions, and annuities) but are reluctant to spend dollars from other sources, such as investment savings, according to research from industry scholars Michael Finke and David Blanchett.³ In fact, as their research shows, retirees spend 80% to 85% of their guaranteed lifetime income but only about 50% of their other available funds.

Guaranteed income leads to confident retirement spending

Guaranteed income gives retirees the confidence to spend their money. Retirees with one form of guaranteed income—annuities—spend twice as much as retirees with equivalent amounts in non-annuitized savings, according to research published in the Financial Planning Review.³ That’s because lifetime income sources like annuities remove two major anxieties: the uncertainty around how long you’ll live and the complexity of calculating a safe withdrawal rate from your investments.

“With an annuity, you’re transferring longevity risk to an institution that’s willing to provide you income even after you would have run down your savings account,” Finke said in a recent interview with TIAA.⁴ “If the market goes down, or if you live a very long time, you know that you’re never going to run out of income.”

Based on her 20-plus years as an advisor, Patello observed that nearly all of her retired clients who are confident spenders have sizable amounts of guaranteed income. “Lifetime income feels dependable—safe, renewable, and meant to be spent,” she says. “It's psychologically categorized as ‘income.’”

So how much guaranteed income do retirees need to feel confident in retirement spending? Patello suggests that somewhere between 30% to 67% of your lifestyle should be covered by guaranteed sources. By providing for the basics with guaranteed income, it allows retirees to invest the remaining assets more aggressively.*

For the psychiatrist, confidence came in the form of a more sophisticated notepad. Patello used an asset location worksheet—a visual tool that maps investments across taxable, tax-deferred, and tax-free accounts to maximize after-tax returns. She gave every dollar a specific job.

Over time, she allocated enough assets to guaranteed income to cover all basic needs, implemented strategic Roth conversions to offset taxable required minimum distributions, and helped establish a special needs trust and life insurance for their daughter. The result was straight from Psychology 101—what academics call behavior substitution. Once Patello’s client could see that each dollar had a purpose, his fear began to dissolve.

The transformation was striking. “When you stop working, your dollars start working, and their job—and only job—is to produce future income for you,” Patello says. Seeing that their savings more than covered their basic needs, the psychiatrist and his wife realized they could spend confidently without jeopardizing their daughters’ future. By unpacking clients’ fears and building strategies around guaranteed income, she says advisors can help older clients sleep well at night and spend confidently throughout their retirement years.

* This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances, which should be the basis of any investment decision.

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To explore how a TIAA advisor can help you optimize spending in retirement, contact your TIAA Wealth Management advisor. Don’t yet have an advisor? Schedule an appointment.