It’s been estimated that 10,000 to 11,000 baby boomers retire a day, nearly 4 million a year. Those people are likely trying to figure out what to do with all their retirement money, and according to the asset management firm BlackRock, a number of them are in fact hoarding it.
The asset manager worked on research with the Employee Benefit Research Institute and discovered to its surprise that after retirees were segmented by wealth, after 18 years most people still held on to an average of 80 percent of their pre-retirement assets. This was a median figure, and the results were distributed, but a third of people in each of the wealth bands had actually increased their assets.
“The key takeaway was that across all these wealth segments, people are not spending down their assets,” says Anne Ackerley, a managing director and head of BlackRock’s U.S. and Canada defined contribution group.
“How do we get people from the save, save, save mentality to the spend, spend, spend mentality?” she asked at a round table discussion in New York on Tuesday.
The firm pins this behavior on a number of economic and social factors: People have felt more comfortable holding onto assets because they have been supported by Social Security and Medicare and the onetime ubiquity of defined benefit plans, not to mention the overconfidence offered them by huge market appreciation over the past few decades.
Emily Haisley, who leads BlackRock’s behavioral finance team in London, said at the round table that there are further psychological factors at play: People should be trying to smooth out their consumption over their life spans, but for whatever reason, they don’t “consume” after they retire. She said it’s the “mental accounts” people use—they adamantly believe they should spend income and not principal and don’t see these as fungible. Also, they tend to believe their assets should continue to grow (since a growing pot choirs with their overall happiness).
“People have a strong aversion to worsening trends,” Haisley said. “We like to think of things getting better and better over our life spans.” To smooth out consumption, “they are going to have to see their balance go down over time. And that’s painful for people.”
Target-Date Funds To The Rescue?
Nick Nefouse, who co-heads the firm’s LifePath target-date fund franchise, says BlackRock is developing a spending tool for individuals and plan sponsors (currently in beta testing) that is meant to make target-date portfolios a permanent fixture of retirement spending and create auto payouts just as those in saving mode have “auto-enrollment.”
“The auto features [for savers] came into effect in 2006 with the Pension Protection Act,” Nefouse said at the round table. “We have now seen things like auto-enrollment, auto-escalation. What we want to help people do now is auto-retire. How can we get somebody to think about a paycheck that’s going to happen the first of every month?”