Think investor. ‘Why retirees tend to spend cautiously’

Previously in this column, we discussed why spending is a natural behaviour and saving is a forced habit. This behavioural tendency can, however, change with age. Individuals tend to be careful with their spending decisions during retirement than during their work life. In this article, we discuss why retirees typically tend to spend cautiously, even though the retirement period is referred to as the spending phase.

Longevity risk

You earn active income during your working years using your skills. By contrast, you must depend on passive income to meet your post-retirement lifestyle expenses. This refers to income generated from your investments. Your retirement is unlike any other goal that you pursue during your working life. Why? A goal typically has a predefined time horizon. For instance, a goal to buy a house within five years of your working life. Your post-retirement living cannot have such a predefined time horizon, as it depends on how long you live. Note that life expectancy is an average age that you must use to accumulate wealth during your working life for your retirement. What if you spend generously during the early retirement years only to find yourself out of money during the later years? Or what if you live beyond your life expectancy? These are genuine concerns for many retirees, driving them to be conservative in their spending habits during retirement.

You can moderate your longevity risk (the risk of outliving your investments) by investing in products that generate stable income streams to meet your post-retirement living expenses. For instance, you can invest in monthly income bank deposits. Some earn rental income from investment properties. You can also consider buying lifetime annuities that pay monthly income till you live, or joint life annuity that pays till you or your spouse, whoever lives longer.

Conclusion

True, spending comes easily to us compared with savings. Yet, we become conservative during our retired years because of the fear of outliving our investments. Denying yourself comfort during early years of retirement to conserve capital for later years could only help your children with the unintended legacy! Because longevity is uncertain, you must smoothen your spending habits so that you have a comfortable post-retirement lifestyle, yet do not run out of money. If individuals are gifted a box of assorted gourmet chocolates, many either save their favourite chocolate for the last or eat it first. Your spending decision in your retirement cannot work on the same logic.

(The author offers training programmes for individuals to manage their personal investments)

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