Are retirees racing through their savings in the first 5 years?

CFPB study offers interesting findings about effects of lump-sum pension payments, mortgages on retiree income.

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Nearly half of the retirees who provided information about their financial resources and expenses as part of a nationwide survey said they did not have sufficient income to maintain the same level spending for the first five years of retirement, a federal agency said in a new research brief.

The Consumer Financial Protection Bureau commissioned the study to pinpoint various ways would-be retirees can better prepare and also to take steps to minimize racing through too much of their savings in the early years of retirement. Certain financial decisions “may enhance or diminish” the ability to maintain spending levels, the study said.

“A growing number of retirees are not experiencing the expected gradual reduction in spending after they retire,” the CFPB said. The bureau said it found “the ability to maintain the same spending level in the first five years in retirement was associated with large spending cuts in later years.”

The research brief relied on responses to the Health and Retirement Study from individuals over the age of 50 who retired between 1994 and 2012. The CFPB study, described as a first of its kind, did not attempt to make any conclusions about financial preparedness over the full course of retirement.

Forty-nine percent of respondents said they did not have sufficient income, savings and/or non-housing assets to spend at the same level for the first five years of retirement. Of the 51 percent who said they could maintain spending levels: 27 percent of retirees in that group said they were using pensions, Social Security and annuities as their income, and 24 percent of respondents said they could maintain the same spending level after “adding the value of retirement accounts, savings, mutual funds and/or other non-housing assets, such as vehicles or businesses.”

The CFPB said it found retirement preparedness varied by factors including race, sex, marital status, health and generation.

“More specifically, the ability to maintain the same spending level for five years after retiring was higher among retired: men than women, whites than non-whites, married than non-married, and with a college degree than without a college degree,” the CFPB research brief said. “Furthermore, a greater percent of retirees born before 1946 than retirees born between 1946 and 1964 (baby boomers) had the ability to maintain the same spending level for five years after retiring.”

Entering retirement without a mortgage was “positively associated with retirees’ ability to maintain the same spending level for five years,” the CFPB said, as was choosing a monthly pension annuity rather than a lump-sum payout.

“In general, retirees with pension income had greater ability to maintain the same spending level for five years after retiring than retirees without pension income (73 percent versus 39 percent),” the consumer bureau said. “Among retirees with a pension, the analysis shows that those who chose a pension cash-out were less able to maintain the same spending level for five years after retiring than those who chose to receive their pension as a monthly payment (73 percent versus 56 percent).”

The survey also found that retirees who claimed Social Security at retirement age, rather than claiming an earlier reduced benefit, contributed to the ability to maintain spending levels for five years.

Mike Scarcella is a senior editor in Washington at law.com. Contact him at mscarcella@alm.com and follow him on Twitter @MikeScarcella.

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