Self Defense
Adam M. Grossman | Jan 5, 2025
Which of these approaches (see article) to risk management makes the most sense? I’m not sure there’s an easy answer. That’s because risk management, in my view, is one of the toughest concepts in personal finance. For example, a recent article in The Wall Street Journal was titled “Even Rich Retirees Fear Outliving Their Money.” It describes a paradox that economists refer to as the “consumption puzzle.” Studies have found that retirees are happier when they spend more, and yet—on average—retirees appear to spend much less than they could afford to.
The article references a new paper in which retirement researcher David Blanchett quantifies this phenomenon. Using the 4% rule as a benchmark for a reasonable portfolio spending rate, Blanchett found that retirees spend, on average, just 2.1%. The upshot: They could afford to double their spending without materially jeopardizing their plans.
Why are these folks spending so little—and why, on the other hand, do some people spend so much more than they can afford? My guess is it’s because risk is intangible and it’s complicated. It takes many forms and, as a result, it’s hard to quantify and thus hard to manage. The result: When we ponder risk, we tend to lean on emotion, instinct or rules of thumb. But there is, I think, a better way.
Read the full article including the risk management approaches on HumbleDollar.com
QUINNSCOMMENTARY 
Excellent article selection. Many thanks to James and Jack for responses that make one think.
Who knows why folks in retirement do what they do? Article and responses cover some logical reasons. My parents lived thru the Depression so they wanted to be, and had to be , self sufficient. They were very careful about money. No cruises just daily routines like fishing, hunting, situation is much different.
I’ve found most folks live within their means during years of retirement. Many would like to live better but can’t due to total assets. So they do their best and worry about nursing home expenses.
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Retirees with sufficient savings/investments to easily handle a 4-5% draw from their accumulation are for the most part lifetime savers. They invested with the idea of growing their balance to keep from running out of money in their very old age. Putting more in each year and keeping hands off the balance became an ingrained habit.
When they (we) get the age where they (we) are supposed to use the accumulation we are reluctant to change decades of habit. A learned habit is hard to suddenly flip on its head just because a retirement day came round. We want to see the accumulation continue to grow. I think what we are dealing with is learned behavior.
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The authors of the paper note, elsewhere, that the retirement consumption puzzle may apply when “individuals do not plan rationally for an expected reduction in income at retirement”.
Certainly true. But, in attempting to extend that to “the rich” suggests individuals who may or may not have planned for retirement, but definitely have wealth more than sufficient to overcome any “expected reduction in income”.
Remember, “income” ≠ “wealth”; “highly paid” ≠ “rich”.
The article suggests age 65+ “ultra-frugal”, “rich” retirees keep working because they are scared of going broke: “… Now almost 20% of Americans 65 and older are employed, nearly double the share of those who were working 35 years ago. …” I suspect that is a very small minority of workers age 65+.
First, keep in mind that “65” ain’t what it used to be.
My parents (born 1916, 1924) both worked until physically spent and suffered illness – my firefighter father died at age 53, my relocation specialist mom “retired” after a disabling illness at age 64.
For comparison, I am a Boomer well in excess of 65 who continues to work in the hope of continuing to make a positive contribution.
Others may still be working because they previously suffered a disability, an economic dislocation (most full time workers who are age 65+ have a different employer than the one they had at age 50), and/or they failed to prepare.
Yes, many live beneath their means, at least until inflation increases spend to that level.
However, always keep in mind the experience of actual retirees – the experts who have been there, done that:
Click to access retirement-experiences-people-over-85.pdf
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