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Baby Boomers' Retirement Strategy: Binge Spending Or Nothing At All

03/30/2015 11:32 am ET | Updated May 30, 2015
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When it comes to retirees and their nest egg, there's no strategy regarding how much they spend a year. It's either a big chunk or nothing, according to a study by a financial research firm.

That investor behavior instead of taking a steady stream of 4 percent that financial advisors recommend on a yearly basis is becoming part of the norm, according to a report from Hearts and Wallets, which has analyzed data of more than 30,000 households over the last five years.

The strategy is about doing what people want to use their savings for by spending in chunks, but many people feel ashamed for their behavior, says Laura Varas, a partner and co-founder of Hearts and Wallets.

Their study shows that 28 percent of older Americans took no retirement income from their personal assets -- that includes IRAs, 401(k)s, bank accounts and brokerage accounts. Another one-quarter took 8 percent or more, Varas says. The breakdown shows that in 2014, some 12 percent took more than 9 percent.

Overall, there are 52 million households of those 55 and older who control $29 trillion in investable assets, Varas says.

"What we do know is that there doesn't seem to be a lot people that are in this 4 to 5 percent range. Most people are concentrated in the zero or in this chunk-taking range," Varas says. "We have been stymied by this behavior. We have not seen any increase in this magical withdrawal rate of 4 to 5 percent. Maybe this isn't happening because people don't want to do it. Maybe, people want to spend in this pattern of frugality and taking chunks."

What was discovered in focus groups is how there's a lot of shame and condemnation of people who spend chunks of money, but those without pensions still wanted to do that, Varas says. They preferred alternative periods of frugality with splurging.

"We're not advocating spending irresponsibly," Varas says.

We're not making any value judgements or giving anyone any financial advice. What we're seeing is that this is a behavior pattern that is a bit more natural than converting to this 4 percent income stream or some income annuity. On the second hand, there are people that are spending zero that maybe could be enjoying life a little bit more.

Varas says they asked focus groups why people are spending like this and got many answers. Some say it's for one-time expenses and how in retirement everything changes in a year. There may be grandkids getting married where they want to buy something, she says.

"We have had people say my friends who retired can't spend it fast enough. They say they give money to their children and grandchildren, and they don't need that much money. They are traveling and buying a new car," Varas says. "The point is financial analysts like to model things in smooth percentage ranges over time, but life doesn't happen that way."

Some focus group members say another reason people spend in chunks is a grim one. The person is sick and may die soon or has a chronic illness, she says.

The other reason they dip into their retirement savings in chunks is because they lost their jobs, and they plan on returning to work, she says.

For those who have one million or more in investable assets, virtually none of them are taking out more than 6 percent a year, Varas says. Much if it is focused on lower income groups of less than $500,000m she says.

Many people call retirement the last phase of their life, the last chapter that they're trying to optimize with a sound retirement strategy, Varas says.

"Knowing how to spend safely in chunks is something they want," Varas says.

Taking your life savings of $500,000 and turning it into $28,000 a year isn't very joyful but maybe living off Social Security and living pretty frugally for a year and then taking your family on a cruise with all your grandchildren and nieces and nephews is joyful. They want to spend in chunks that give them joy.

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