When she was working with academics to research lifetime income, personal finance columnist Jean Chatzky noticed something curious: Retirees didn’t want to spend their money.
It wasn’t a lack of funds holding them back. Some of them had “huge sums that they would have a hard time spending over the course of the rest of their lives,” Chatzky says. For many, the problem was emotional.
It’s an issue Chatzky was personally familiar with. After her father died in 2005, her mother struggled with spending their retirement funds. They were fortunate. There was a pension from her father’s career as a teacher, Social Security income, and a hefty balance in their retirement accounts. Chatzky’s mother would spend the pension and the Social Security income, but she was afraid to touch the principal balance in the retirement account.
That problem, Chatzky and the researchers found, was common. People with pensions spend close to double the amount compared to those with 401(k)s or Roth IRAs. Part of it is how the funds are structured. Pensions and Social Security funds are paid out monthly, much like a paycheck. Whereas a 401(k) is one large sum of money.
“You’ve saved money for 20, 30, 40 years and watch the balance grow,” Chatzky says. “To see it head in the other direction is really uncomfortable.”
The problem motivated Chatzky, a former AARP columnist and current financial editor for NBC’s Today show, to write The Forever Paycheck, a guide to comfortably spending the money they’ve saved.
On September 14, Chatzky joined The Philadelphia Citizen Executive Director / Editorial Director Roxanne Patel Shepelavy onstage at the Fitler Club Ballroom for a rousing conversation in front of around 100 guests, including many soon-to-be retirees. The topic: Retirees should spend their savings, by first structuring funds to last through old age.
The conversation couldn’t be more timely: More and more people have 401(k)s and similar accounts and fewer have pensions — something Chatzky explained at the top of the event. 401(k)s got their start in the 1980s when Philadelphian Ted Benna noticed “a wrinkle in the tax code,” Chatzky says, that allowed companies to create savings accounts for their employees. Employees could contribute to these plans pre-tax. Now, they’ve overtaken pensions in popularity, in large part because companies don’t want the responsibility of managing pensions for thousands of employees.
Chatzky’s research also found that people tend to spend more early in retirement — as people check off major bucket list items: river cruises, visiting the Taj Mahal — and in their later years as they navigate failing health. If you chart out typical retirement spending it “looks kind of like a lopsided smile,” Chatzky says.
To balance spending, she recommends folks structure their retirement savings so that it goes into their bank accounts like a steady, monthly paycheck — just like it did when they were working. She believes this approach will help people feel comfortable spending more. Her book provides worksheets to help readers calculate how much they’ll need in that paycheck to let them do what they need, what they want, and what they hope for.
“The idea here is that rather than take money out of your 401 (k) or IRA or whatever investment portfolio in order to pay your mortgage or to take your trips, you are having that money to put into your bank account the way it was when you were working,” Chatzky says.
The takeaway from the evening: Spend your money. You can’t take it with you.
See our highlight reel here:
Photos of The Citizen’s The Forever Paycheck event with Jean Chatzky below:
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