Throughout your career, you'll hear countless financial experts telling you how important it is to save for retirement. The reason is simple: Having a retirement nest egg means you can afford to keep paying your living expenses without a paycheck. Indeed, with life expectancies increasing and the length of time in retirement growing longer, the advice you'll hear most often is to set aside more than you might otherwise save in order to minimize the chances of running out of money.

Yet the entire point of retirement saving is to spend down the assets in retirement that you've worked so hard to accumulate throughout your career. That's what makes it so surprising that even retirees with relatively modest financial assets are extremely slow in spending their nest eggs. In fact, according to the latest study from the Employee Benefit Research Institute, some retirees end up spending so little that they actually grow their savings over the course of their retired years.

Bottle marked Retirement with cash inside, next to a calculator.

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Retirees aren't spending down their savings

The EBRI study [opens PDF] looked at how households spend their retirement assets during the first 20 years after they retire. What they found was that in general, retirees prefer to keep their spending roughly in line with their income, avoiding drawing down their assets when at all possible.

What's especially surprising was that even those of relatively modest means worked really hard to preserve what they'd managed to save. Those with less than $200,000 in retirement assets other than their primary home typically spent down about a quarter of their assets during the first 18 years of their retirement. Those with between $200,000 and $500,000 in non-home assets had spent down a slightly greater portion of their savings at 27%. Yet those with more than $500,000 in savings available typically spent down less than 12% in the first 20 years of retirement.

What helped retirees preserve their assets

Looking more closely at the study, there were a couple of factors that helped some retirees preserve even more of their retirement savings. First, those who received private pensions from employment were better able to avoid tapping into their nest eggs during the first part of their retired years, with the typical pension recipient seeing their assets drop over an 18-year period by just 4% from where they'd started.

Also, many people were able to grow their assets even during retirement. About a third of those surveyed had more assets after 18 years than they had when they retired. That likely reflects in part the success of the stock market over that period, with substantial overall gains despite being punctuated by occasional dramatic pullbacks.

Why don't retirees like to spend down their savings?

At first glance, it might seem silly that retirees are so slow to spend their savings. Yet the very nature of retirement savings suggests some possible explanations.

One reason why retirees avoid spending down their nest eggs is that there are typically tax consequences associated with withdrawing money from retirement savings. Many retirees use traditional IRAs to hold their retirement savings, either because they've used IRAs their entire lives or because they've rolled over 401(k) or other employer-sponsored retirement plans into IRAs. When you take money out of a traditional IRA, you usually have to include the entire withdrawn amount as taxable income. That not only directly increases your tax bill but also potentially puts more of your income at risk of taxation because of having higher adjusted gross income. For example, those who receive Social Security can find that some of it might get taxed if income from other sources -- including taxable IRA distributions -- is too high.

The study suggests that retirees prefer to keep their nest egg principal intact in order to handle major potential financial crisis situations. Things like long-term care expenses are hard to predict, and they can be catastrophic if you're not prepared. Another possible explanation is that people want to make bequests of retirement assets to children and other heirs or that retirees just don't know exactly how much they can really afford to withdraw.

Finally, the structure of the survey creates another possible explanation. The study didn't include 401(k) balances left with an old employer in retirement, which means that drawdowns from 401(k)s wouldn't be reflected in the figures that the study collected. Instead, it would seem as if retirees were able to finance their living expenses without touching the assets that the study took into consideration.

What this means for retirees

The study suggests that if retirees want to preserve assets rather than spending them down, different financial products might be appropriate. Yet if those decisions are ill-informed, then education about safe withdrawal rates would be more prudent.

The key takeaway for everyone is that it makes just as much sense to plan how you'll spend your retirement savings as it does to plan how to save enough toward retirement. Only by knowing what will make you financially comfortable in retirement can you craft a lifelong financial plan that will actually work for your needs.

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