I spend a lot of time talking to retirees about their spending plans. Many of them proudly told me that their payouts were well below the 3%-4% initial withdrawal amount often circulated in the context of safe payout rates. They tell me they’ve been frugal, they’re frugal, they don’t need more. Underspending seems to be part of their identity.
These are all praiseworthy things. But they got me thinking about the interplay between underspending and the potential for money left over at the end of life. When you look at our retirement income research, you’ll see the fact that underspending often leads to large remaining balances.
Even retirees who spend according to our “base case” (meaning an initial withdrawal of 3.9% in 2025, with withdrawals adjusted for inflation each year thereafter) tend to have large remaining balances 30 years after withdrawals. For example, for someone who starts retirement with $1 million, initially withdraws $39,000 (3.9% of the balance), and adjusts this dollar amount for inflation over the next 30 years, the median ending balance for a balanced portfolio would be about $2 million, and for a stock-heavy portfolio, the median ending balance would be even higher.
Of course, being left with a sizable remaining balance isn’t a terrible outcome. These funds are often inherited by children, grandchildren, charities, or other loved ones who can put the money to good use. Many retirees are quite concerned about encountering huge long-term care expenses later in life; for those without long-term care insurance or a separate fund for long-term care, underspending may be a reasonable approach and can certainly provide peace of mind.
But as Mike Piper points out in his excellent book More Than Enough, giving smaller gifts to loved ones early in their lives may be a better strategy than leaving assets after death.
The average age of estate heirs is 51, and more than a quarter of estate heirs are over 61. At this stage of life, these legacies can certainly be used to enhance the retirement security of your heirs.
But by the time we reach our 50s and 60s, the trajectory of our lives is often set. The 2022 Survey of Consumer Finances report shows the median inheritance is $69,000, a drop in the bucket of what people will need to pay for retirement expenses. Meanwhile, an earlier, smaller gift, such as a down payment on a house or help paying off a student loan, may have a larger impact by helping a younger loved one get on their financial footing.
It goes without saying that it is better to see your money put to good use during your lifetime than to have it disappear when you die. That’s what my parents did in 1994, when they helped us with the down payment. Their early gifts meant more to my husband and me than the inheritance we received from them at the end of their lives, even though the latter was much larger.
