Spend it if you got it: How frugal retirees impact all of us

Spending too much and saving too little has become as American as apple pie. But, there is one group that bucks this trend: older Americans. 

As outlined in my recent report analyzing data from two University of Michigan surveys sponsored by federal agencies, the average adult aged 60 years or older will trim his or her spending by about 2.5 percent every year, or approximately 20 percent over a 10-year period. Spending drops even faster for people in their 80s compared to younger retirees, falling by an average of about 30 percent over a 10-year time-period.

{mosads}The surprising result: Rather than depleting their assets as they age, the average retiree is instead actually accumulating wealth. In fact, the average adult who dies in their 60s leaves behind $296,000 in net wealth, $313K in their 70s, $315K in their 80s, and $238K in their 90s.

Declining economic optimism may help explain why people in their golden years are so hesitant to spend. In 2014, for instance, adults over the age of 64 were over 30-percent more skeptical about future economic growth and 40-percent less convinced of future stock market increases compared to adults under the age of 35.

Indeed, the average older adult believed the stock market had less than a 50-percent chance of increasing in all but one year between 2002 and 2014; even though most major stock market indexes increased in all but two of those years. By contrast, every other age group felt like the stock market had more than a 50-percent chance of increasing in most of those same years.

Given their dour view of the economy’s prospects, it makes sense that older Americans would also take a dim view of their own financial prospects. Adults over the age of 64 are 40-percent less optimistic about their future financial health than are adults under 35. That gap is widening: For every year added to the life expectancy of the average U.S. adult, the gap in economic optimism between younger and older Americans has increased by 3 percent. 

In a world in which many people are spending too much money, why should we care about some retirees living too frugally? The economy is one reason to care, since spendthrift retirees are stockpiling growing sums of capital and holding back consumer spending growth.

Since 1989, for instance, the amount of U.S. household net-wealth concentrated among households headed by someone 60 or older has increased from 44 percent to 52 percent. Similarly, nearly half of all of the millionaires in U.S. are now over the age of 60, compared to about 42 percent in 1989. 

U.S. retirees are hoarding a lot of cash and assets. #Retirees #Cash #Pension pic.twitter.com/q4fU0dXMwh

— Walbrock Research (@Wh_biz32) May 22, 2017

Another reason to care is that too much anxiety about the future can become a self-fulfilling problem for some retirees. Overly pessimistic views about future stock market growth can lead to investment portfolios that are too concentrated in cash and bonds, which may not generate enough of an investment return to pay for their longer lives.

Even if a retiree can survive on low investment returns, underconsumption could mean they prematurely retract from spending time with friends and family. Over time, research shows that this can hasten physical and mental problems.

It will take more than the usual fiscal and monetary policy toolkit to address these issues. Policymakers should instead promote private and public vehicles that ease retirees’ long-term economic anxiety, perhaps by better insuring against growing longevity and long-term care risks — much in the way policymakers did during the Great Depression through new programs like Social Security. 

After all, the impetus for Social Security was as much about generating a stimulus by unlocking hoarded savings (caused by anxiety about the future) as it was about poverty reduction.

Expanding consumer finance surveys like the Federal Reserve’s Survey of Consumer Finance and the Department of Labor’s Consumer Expenditure survey or increasing survey grants to universities to better study economic decisions of older Americans would also be catalytic.

We all share old age as a fate. But, it’s increasingly a fate that has consequences for everyone as more of the economy becomes dependent on the financial decisions of older Americans. Through targeted, creative thinking, we can make that a more positive reality for everyone, while also improving the quality of life in retirement.

Matt Fellowes is CEO of United Income, a financial planning and investment management company aimed at people nearing or transitioning into retirement. Prior to United Income, he was chief innovation officer at Morningstar, founder of HelloWallet, and a Brookings Institution fellow. Elizabeth Kelly is chief of staff at United Income. She previously served as special assistant to the president at the White House National Economic Council, where she handled retirement and consumer protection issues.

The views expressed by contributors are their own and not the views of The Hill.