Are Older Americans Being Too Cautious With Saving and Spending?

Innovations in medicine and technology have extended human life by over 30 years since 1900, which has helped to double the amount of time the average adult now spends in retirement compared to several decades ago, notes Matt Fellowes, CEO of United Income in a report.

Despite retirement industry suggestions that Americans should draw down less income in retirement, Fellowes’ paper suggests older Americans are not spending enough to live their retirement dreams. “Longer lives and retirements have ushered in an extraordinary opportunity for older adults to live out life-long dreams, embark on second careers, or use their experience and knowledge to give back to the next generation,” he writes. “Yet, our confidence about future economic growth and our own financial wellbeing wanes as we age and in some cases overly so, which may be on reason why spending deaccelerates for aging households as they seek to maintain wealth at the expense of income preservation.”

Fellowes suggests the “data signify that special care needs to be taken to educate age cohorts about their biases to avoid investment portfolios and financial plans that are too conservative and become self-fulfilling prophecies of economic problems.”

United Income analyzed consumer sentiment and spending data from the University of Michigan that was commissioned by the Social Security Administration and U.S. Commerce Department, among other federal agencies, and found adults become less optimistic about future economic growth and financial health as they age. In 2014, for instance, adults older than 64 were more than 40% less optimistic about their future financial health, more than 30% more skeptical about future economic growth, and 40% less convinced of future stock market increases, compared to adults younger than 35.

In addition, the analysis showed the average older adult felt like the stock market had less than a 50% chance of increasing every year between 2002 and 2014—even though most major stock market indexes increased in all but two of those years. By contrast, every other age group felt like the stock market had more than a 50% chance of increasing in most of those same years.

“Perhaps as a reaction to declining financial optimism, the average adult 60 years or older will trim their spending by about 2.5% every year, or by about 20% over a 10-year period. We also find that spending drops faster for people in their 80s compared to those in their 60s and 70s, falling by about 30%, on average, over a 10-year time-period. In addition, spending volatility grows as we age—increasing from an average of 6% variance for adults in their 60s to 9% for people in their 70s or older,” the paper says.

The analysis also found that wealth and investments generally grow in value as people age. The average retired adult who dies in their 60s leaves behind $296,000 in net wealth, $313,000 in their 70s, $315,000 in their 80s, and $238,000 in their 90s.

The full report, “Living Too Frugally? Economic Sentiment & Spending Among Older Americans,” is here.