Retirees Spend Lifetime Income, Not Savings

ABSTRACT The shift to defined contribution savings plans means that more retirees must fund spending from savings. Prior studies find that retirees spend less from savings than life cycle models predict. Using data from the Health and Retirement Study, we explore how lifetime income, wage income, capital income, qualified savings, and nonqualified savings are used to fund retirement spending. We find that retirees spend far more from lifetime income than other categories of wealth. Approximately 80% of lifetime income is consumed, on average, versus only approximately half of other available savings and income sources. We also find evidence of the importance of mental accounting in framing savings as income from an increase in spending from qualified savings after required minimum distributions begin. Overall, the analysis suggests that retirees could increase spending by converting wealth to lifetime income or following spending rules that shift investments into liquid savings.