Sometimes, retirees are just too frugal

Do retired people spend less as they get older? Apparently, they do. On average, retirees age 60 or older trim their spending by 2.5 percent a year, or by about 20 percent over a 10-year period, according to a new report by United Income titled "Living Too Frugally? Economic Sentiment and Spending Among Older Americans."

This reduction in spending by retirees might be a logical consequence of running out of money. However, the United Income report also found that wealth tends to grow as people age. For example, the average retired adult who dies in their 60s leaves a legacy of $256,000, but that amount grows to $313,000 for people who die in their 70s and $315,000 for people who die in their 80s.  

The research found that adults become less optimistic about the economy, stock market performance and their financial health as they age. Matt Fellowes, CEO of United Income, offered this decline in optimism as one possible explanation for the drop in spending as retirees age.

Other possible reasons retirees might cut back spending as they age include:

• As retirees transition from their go-go years to their slow-go or no-go years, they spend less money on travel and activities.
• As retirees live longer, they're more aware that they might outlive their money.
• Retirees may want to keep some money in reserve for higher health care and long-term care costs in their 80s and 90s.

Another possible explanation is that the average wealth figures are skewed by the few people who have lots of money, and that the median wealth amounts are typically much lower than the average figures. In other words, the retirees with large savings might reduce spending as they age, and the rest of the retiree population lives Social Security check to Social Security check.

One concern about this reduction in spending is that retirees might be living too frugally and could be enjoying life more by spending more. From a macroeconomic perspective, as the percentage of older Americans rises, reduced spending could also create a drag on economic growth.

One way to protect yourself from running out of money and be confident about your spending for the rest of your life is to build sources of income that are paid the rest of your life, no matter how long you live. This means:

• Optimizing your Social Security income, usually by delaying the start of benefits as long as possible
• Using a portion of your retirement savings to buy a low-cost payout life annuity
• If you're lucky enough to participate in a traditional pension plan, electing the lifetime monthly paycheck

If you choose to invest and draw down the remainder of your savings, you can use the IRS required minimum distribution to determine the paycheck from these savings. This withdrawal method is structured to last the rest of your life, but the amounts of income might be very volatile from year to year depending on investment performance. 

That's an additional reason for building guaranteed sources of income to cover your basic living expenses.

Here's another idea: Like other retirees, you could choose to work part-time in your retirement years for the "mad money" you spend on vacations, hobbies and gifts. Then as you age and are less able to work, you could cut back on your discretionary spending to the level supported by your Social Security checks and withdrawals from savings.

If you're uncertain about how to make your money last the rest of your life, it's only natural to feel less optimistic about the future and slash your spending. To feel better about your future, consider working with an adviser who's qualified to develop retirement income strategies that support a realistic level of lifetime spending. In this case, make sure they don't have any conflicts of interest in how they're paid and have your best interests at heart -- what's known as a fiduciary responsibility.

Living on just your savings won't be easy, so you'll want to be creative and resilient to plan the most enjoyment for the rest of your potentially long life.