The Financial Planners Teaching Frugal Retirees to Live It Up

(Bloomberg Businessweek) -- Ah, retirement. You work, you save, and you invest so that when you finally clear out your desk and say farewell to colleagues, you can travel the world or kick back at your beach house. Yet recent studies show that many retirees are so fearful of big expenses late in life that they continue to scrimp long after they've left the office. The BlackRock Retirement Institute estimates that in the first two decades after quitting their jobs, people with savings of more than $500,000 had drawn down only 17 percent of their portfolio. Medium-wealth households—with savings from $200,000 to $500,000—had reduced savings by 23 percent.

No one, of course, wants to run out of money in their elder years. Retirees are often fearful of hefty medical bills or long-term care costs and don't know how long they'll need their savings. “One of the reasons they've managed to accumulate so much money is they have been careful with their spending,” says Molly Balunek, a financial planner in Cleveland. “They have a lifelong pattern of frugality.”

Financial planners say even reams of data showing that clients have the resources to weather any realistic scenario can't change a mindset developed over a lifetime of saving. To get clients to live a little, planners suggest focusing the conversation on the ways spending more can make life more meaningful—funding trips for an extended family, paying for the education of grandchildren, or being more generous with charitable contributions.

Balunek has a frugal client who spent more than $50,000 taking adult children and their families for an extended stay in Hawaii. Jonathan Guyton, a financial planner in Edina, Minn., encourages thrifty retirees to steer some portion of, say, dividend payments into an account labeled “mad money” for fun stuff that goes beyond day-to-day living expenses. “People in this position generally had some degree of discipline and thoughtfulness that saving requires,” he says. “Use the approach you had with savings and apply it to another question—spending.”

If you're afraid of outliving your retirement account and ending up destitute, insurance and savvy investment strategies can help. The simplest move is to delay Social Security. The benefit is more than 75 percent higher if claimed at age 70 than at 62, the earliest age to file. And long-term care insurance can alleviate concerns about the potential high cost of infirmity, even though premiums have gone up and benefits are being trimmed.

Wade Pfau, a professor at the American College of Financial Services, says the “classic solution is an annuity” in which people invest a sum of money with an insurance company in exchange for a fixed monthly or annual payment until they die. A variation on that idea is longevity insurance, in which the cash doesn't start flowing back toward buyers until age 80 or 85. Those policies cost less upfront because of the coverage delay, but offer peace of mind to those who fear running out of funds later on.

Despite the simplicity of annuities, many people prefer to maintain control over their money and fret they might die before the longevity insurance payments start. “It's an excellent strategy, but there is too much of a struggle to get people to buy something they won't use for 25 years,” says Bruce Wolfe, principal at management consulting firm C.S. Wolfe & Associates LLC.

One alternative is what's called a bond ladder, in which retirees purchase safe investments such as certificates of deposit or U.S. Treasury Inflation Protected Securities—TIPS—of various maturities. Each year, a portion of the investment matures, providing a steady income stream. The downside is that such strategies take some work to manage, and the interest on fixed income securities can be low.

Ideally, retirees will have a spending plan that taps into dividends, interest, capital gains, and—if they're lucky enough to live that long—principal. This is before taking their home, other assets, and family ties into account. So yes, you can probably afford that dream trip. And if something unexpected happens, “most people are resilient enough to make adjustments,” says Ross Levin, a financial planner in Minneapolis. “You've made adjustments all your life.”

To contact the editor responsible for this story: David Rocks at drocks1@bloomberg.net

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