How Guaranteed Lifetime Income Increases Retiree Spending

Retirees with more guaranteed lifetime income spend more in retirement and do so without worrying about running out of money.

The additional spending is meaningful, according to researchers David Blanchett and Michael Finke, who recently updated research they produced in 2021.

Retirees who receive steady income from Social Security, pensions, and annuities spend about twice as much as retirees who have the same amount of savings positioned in the investment markets.

The researchers found that most people think differently about guaranteed income than they do about money in savings and investments. About 60% of retirees surveyed said they’re more comfortable spending on nonessentials when the spending comes out of regular income instead of savings and investments.

People know the guaranteed income will be replaced the next month. They don’t have to worry about changes in the markets or interest rates affecting their ability to spend.

When retirement savings are in investments, no one can be sure how long the money will last and how much can be safely spent each year. Market movements, inflation, interest rates, longevity, and other factors influence how long the money lasts and how much money is available to spend.

Those factors can change quickly and significantly. It’s never clear when changes are temporary or long-term.

People are less confident when there’s so much uncertainty, so they spend less.

There are two ways most retirees can increase their guaranteed income and therefore their spending safely.

One way is to delay claiming Social Security retirement benefits. The other way is to increase the amount of retirement savings used to buy annuities with guaranteed lifetime income.

A couple of caveats to consider are that one of the researchers works for an issuer of annuities and the new study was published by an annuities industry group, the Retirement Income Institute of the Alliance for Lifetime Income.