In theory, the whole point of saving and investing for retirement is that upon reaching retirement, it’s time to spend down the money and enjoy it. In practice, a growing base of research finds that for most of their retirement, retirees are just continuing the growth of their pre-retirement portfolios, suggesting a “consumption gap” between what retirees could and should spend versus what they actually do.
However, the reality is that for a long-term retirement, where compounding inflation can double or even quadruple spending needs after 30 years, retirees actually should allow their portfolios to grow at least slightly for at least the first half of retirement. It’s a necessity just to cover later-years’ spending needs at their inflation-adjusted levels.
Furthermore, given uncertainty about the length of retirement, how high inflation will be, and whether portfolio returns will be favorable or not, often retirees spend even less in the early years just to defend against these risks – an approach now dubbed the “safe withdrawal rate”. Yet given that most of the time markets and inflation don’t actually spiral out of control, following a safe withdrawal rate approach just further increases the likelihood that retirement portfolios will continue to grow throughout retirement.
The end result is that while in theory a retirement portfolio is meant to be spent, in practice most retirees faced with an ever-open-ended potential of living many more years will feel compelled to keep extra assets available, just in case… and never actually reach the point of depleting the retirement portfolio at all! Which, notably, isn’t a sign of inefficient portfolio spending or a consumption gap, but merely the prudent reality of dealing with an uncertain future!