Retirees are wired to not touch their nest eggs, research suggests

Retirees in the US are showing a marked preference for spending income from guaranteed sources such as Social Security, pensions, and annuities, while remaining conservative with their savings – even when they could afford a more comfortable lifestyle.

That's according to new research released by the Washington, DC-based Alliance for Lifetime Income, titled "Retirees Spend Lifetime Income, Not Savings."

Authored by David Blanchett and Michael Finke, research fellows at the Alliance’s Retirement Income Institute, the research draws on data from the Health and Retirement Study, a long-term national survey of roughly 20,000 Americans over 50 supported by the Social Security Administration and the National Institute on Aging.

Apart from highlighting how retirees navigate income sources – that includes guaranteed income as well as capital income – the report unveiled on Tuesday sheds light on the psychology that drives retirement spending patterns.

"Our analysis found much higher spending rates from lifetime income sources than from wages or capital income," the researchers wrote. "Roughly 80 percent of lifetime income is spent, while less than half of wage income and capital income are spent."

The findings offer insights into a retirement system heavily centered on asset accumulation, with relatively less guidance around how to draw down those assets effectively. Blanchett and Finke suggest this lack of clarity may lead retirees to live far below their means, even if they have substantial nest eggs.

The research exposed a telling gap between how retirees spend their savings versus how much financial planners typically advise. The study found that 65-year-old couples spent just 2 percent of their savings annually – half the commonly cited 4 percent rule and even below some updated guidance that points to 5 percent as a more realistic figure.

"Overall, the analysis suggests that converting savings into lifetime income could increase retirement consumption significantly, especially for married households," the report said.

Retirees also shared an interesting attitude toward required minimum distributions (RMDs), which they must begin taking at age 73 from qualified retirement accounts to avoid IRS penalties. These forced withdrawals appeared to be treated by retirees more like income, leading to higher spending levels compared to voluntary withdrawals from the same accounts.

The researchers argue this behavior offers a cue for financial professionals. Blanchett and Finke suggest that reframing how savings are presented could help clients better manage and enjoy their retirement funds.

"Financial institutions that are aware of the tendency to bracket investment decisions differently than lifetime income can focus on reframing wealth as income or automatically liquidate investments to create the appearance of income," they wrote.

For Blanchett, the real-life consequences of these patterns are clear. "Unless people purposefully want to leave behind a large bequest when they die, many retirees are denying themselves the opportunity to enjoy life by spending more of their savings," he said.

The findings run parallel to the Alliance's previously published research around lifetime income, which suggested retirees with guaranteed income sources treat those financial vehicles as a license to spend.