Six ways to safely spend more in retirement

Retirees are being nervous Nellies with their nest eggs.

Yes, retirees are withdrawing money from their retirement accounts at a very slow rate or not at all, according to researchers at Texas Tech University's Personal Financial Planning Department.

And by doing so, they're foregoing a standard of living they could afford based on long-standing economic principles, according to the study, "The Retirement Consumption Gap: Evidence from the HRS."

In fact, retirees with median wealth have what's called a "consumption gap" of about 8% on average — a gap between what they are spending and what they could spend — and that retirees with higher levels of wealth have a consumption gap as high as 45.6%, according to Chris Browning, an assistant professor at Texas Tech University, and his co-authors.

In others words, retirees could afford to withdraw a little and, in some cases, a lot more from their retirement accounts. But they aren't.

"This is an example of what economists call 'precautionary saving,'" says Jeff Brown, a professor at the University of Illinois. "People feel a need to hold on to wealth to deal with uncertainty about future spending needs. The problem is that it comes at a real cost in terms of foregone consumption."

The reasons for the consumption gap phenomenon: The complexity of what researchers call "decumulation" decisions, uncertain longevity and uncertain medical and long-term costs. Plus, retirees have bequest motives. "I receive a 'warm glow' knowing that, upon my death, assets will help my family, favorite charity or other beneficiaries," says Steve Utkus, a principal with the Vanguard Center for Retirement Research.

Still, given that retirees could — presumably — afford to have a higher standard of living in their golden years we asked experts for advice: What can retirees do to make themselves more comfortable spending down their assets?

Optimize Social Security benefits. Retirees could likely withdraw more rather than less or no money from their nest eggs by waiting to claim Social Security until age 70, says Joseph Tomlinson, an actuary and financial planner based in Greenville, Maine.

That tactic, among other things, would produce the highest possible monthly Social Security benefit. In fact, retirees can increase their monthly benefit by 32% by waiting to claim Social Security at age 70 instead of full retirement age. Read Retirement Planner: Delayed Retirement Credits. Claim-and-suspend and restricted-claim strategies can maximize your household's lifetime benefits, too.

Buy a life annuity. If there is a gap between guaranteed income sources and basic spending levels, Brown says the most efficient way to fill that gap is with a life annuity, a type of insurance product that would provide income for life. To make this work, retirees would purchase with a portion of their nest egg a life annuity that would provide enough income to bridge the gap.

Others, meanwhile, aren't so sure retirees will use annuities in the manner intended. "You might at first say annuitization of part of your savings because you are less worried about running out of money and will spend more," says Utkus. "But we don't know whether you will do that. You might just save a larger piece of your income."

And Dirk Cotton, a financial planner with JDC Planning, in Chapel Hill, N.C., says the following: "Should the underfunded retiree buy a life annuity? Probably, but many are not comfortable handing over a big chunk of their retirement savings to an insurance company, and not altogether without reason."

Buy long-term care insurance. Insurance is an option to address fears of unexpected health- and long-term care costs in retirement, says Utkus. "But the issue here is that the market has been highly unsettled, and policies now come with more restrictions and caveats," he says. "But certainly long-term care insurance is worth investigating."

"If people could be convinced to buy long-term care insurance, and secure enough guaranteed lifetime income in the form of optimized Social Security, pensions (if any), and purchasing single premium immediate annuities (SPIAs) so that they would have enough income to cover basic living expenses, they would feel much more secure about spending money in retirement," says Tomlinson.

Calculate a safe withdrawal rate. Knowing how much you can safely withdraw from your retirement accounts ought to give some comfort too. The long-standing rule of thumb is that you could withdraw 4% per year form your retirement account without having to worry about running out of money. However, with high stock market valuations and low interest rates, the actual percent that retirees can withdraw might be lower. Moreover, the truth of the matter is that your safe withdrawal rate is quite personal.

"The actual number depends on portfolio return expectations, remaining life expectancy, and the current balance of that nest egg," says Cotton. "And it should be re-evaluated annually."

Acknowledge human nature. To be fair, retirees – as the research suggests – might not take steps to help themselves manage retirement risks and spend more in retirement. "There's a lot on inertia and people tend to hang on to what they have and avoid making what feel like big financial moves," says Tomlinson. "Also, it doesn't help that is very hard to find competent, trustworthy, unbiased retirement advice for a reasonable cost."

There are other explanations for the consumption gap. One, households value spending more when they are younger, and that consumption becomes less important with age, says Utkus.

And two, high income retirees don't necessarily improve their standard of living all that much by withdrawing more from their retirement accounts and they want to avoid not being able to pay for uncertain expenses later in retirement, says Tomlinson.

For his part, Cotton says the following: "What is the rational thing to do when you don't have enough savings, you don't understand how to invest what you have or how much you can spend and all the options are expensive? You guard what you do have very closely."

Hire a financial adviser. There is one other way retirees can learn how to spend more in retirement, says Cotton. "The solution, if there is one, is to hire a financial planner you trust who understands the complex retirement income and risk problems in the U.S. and can explain them to you, or you spend a lot of time learning about it yourself" he says.

Robert Powell is editor of Retirement Weekly, contributes regularly to USA WEEKEND, USA TODAY, The Wall Street Journal and MarketWatch and teaches at Boston University.