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 PLANADVISER.
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.
NEXT: What is a sustainable withdrawal rate?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.