LTC Bullet:  Retirement Confidence and Asset Spend Down

Friday, April 27, 2018


LTC Comment: Two new EBRI studies shed light on how workers/retirees’ expectations and behavior differ, after the ***news.*** [omitted]



LTC Comment: Two recent reports by the Employee Benefit Research Institute enlighten us about retirement planning versus performance. EBRI’s “2018 Retirement Confidence Survey” is their latest in the longest running (28 years) survey series covering worker and retiree confidence about retirement. Also published by EBRI this month is “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?,” by Sudipto Banerjee, which bursts a long-standing myth about asset “spend down.”

Let’s consider retirement confidence first. We’ll quote EBRI’s Retirement Confidence Survey (RCS), then comment.

RCS: “The share of workers who feel very confident in their ability to live comfortably in retirement remains low at just 17%, but another 47% are somewhat confident. … Retirees remain more confident than workers, with a third (32%) very confident and another 44% somewhat confident that they will have enough money to live comfortably throughout retirement.”

LTC Comment: Almost 2/3 (64%) of workers and over ¾ (76%) of retirees feel confident about their economic security in retirement. What are they smoking? Are they inEBRIated? Evidently workers and retirees haven’t read the omnipresent reports that they’re saving too little and depending on public programs and pensions too much.

RCS: “Why are workers confident? Workers [76%] appear to be very positive about their workplace defined contribution (DC) retirement plans and that may be impacting overall retirement confidence. Those with a DC plan are far more likely to be confident in their ability to live comfortably in retirement.”

LTC Comment: Now, that’s interesting. Remember how progressives lament the transition from “guaranteed” public and company pensions to defined contribution plans that employees own personally? Looks like those DC plans are propping up workers’ confidence in the face of widespread reports of impending entitlement shortfalls and pension collapses.

RCS: “Why are retirees less confident? Retirees’ overall confidence shows signs of decline, but their confidence in being able to afford medical and long-term care expenses in retirement is down significantly. Relatedly, their confidence that Social Security and Medicare will continue to provide benefits equal to what retirees receive today has decreased.”

LTC Comment: Ah-ha! Retirees are finally starting to awaken to the real financial risks they face: growing health and LTC costs exacerbated by impending safety net cuts.

RCS: “Only 19% of workers and 39% of retirees have tried to calculate how much money they would need to cover healthcare costs in retirement.”

LTC Comment: In other words, the vast majority of workers and retirees have no clue what they’ll need in retirement and no idea what it’ll cost. Evidently, their “feelings” of confidence recorded by EBRI have no basis in reality. Why might that be? Social entitlements like Medicare, Medicaid and Social Security have provided a false sense of security for many decades which unfounded confidence is eroding now as those programs’ unfunded liabilities approach the terminal stage.

RCS: “Two in three retirees report Social Security is a major source of income, while only about a third of workers believe Social Security will be a major source. … Workers expect to rely on their workplace DC retirement plans as a source of income in retirement far more than retirees report they have. Eight in ten believe this will be a major or minor source of income in retirement, compared to just 50% of retirees.”

LTC Comment: QED. The inevitable sea change from government dependency to personal responsibility is underway as workers lose confidence in entitlement programs and gain confidence from their ownership of real assets.


Let’s turn now to the other April EBRI report: “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?,” by Sudipto Banerjee. Our comments follow quotes from “ADAP.”

ADAP: “One of the assumptions underlying many models used to measure retirement income adequacy is that retirees will spend down their accumulated assets to fund their retirement needs. While this may make sense in theory, do people actually behave like this?”

LTC Comment: Wow! Someone is finally asking the right question. The universal assumption among academics is that wide swaths of the American public spend themselves into impoverishment on long-term care expenses before qualifying for Medicaid. Of course, as I’ve shown in many studies, Medicaid does not require that and there is no evidence it’s true. So, what is the reality?

ADAP: “Over the 18-year period, there was a very small drop in the median assets of this group [those who started retirement with less than $200,000 in non-housing assets], from $31,740 (after 1- 2 years of retirement) to $24,000 (after 17 - 18 years of retirement). This was only a 24.4 percent drop. Such a rate of asset decumulation was definitely much lower than what has been traditionally assumed by most retirement models.”

LTC Comment: Interesting. How about the other groups studied, i.e. those with $200K to $500K at retirement and those with more than $500K?

ADAP: “In the first two years of retirement, the non-housing asset median for Group B [$200K to $500K] was $333,940. After 13-14 years of retirement the median was still above $300,000 (at $301,620). By the 17th-18th year of retirement, the non-housing asset median was $243,070, a 27.2 percent drop compared to the asset median in the first two years. So, in this group as well, retirees did not spend down their assets as quickly as retirement models would generally predict.”

“The asset decumulation rate was even slower for this group [those with over $500K]. The non-housing asset median for retirees in this group was $857,450 in the first two years of retirement. After 19-20 years of retirement, the median dropped to $756,300 – an 11.8 percent drop. So, the group with the highest level of assets had the lowest rate of asset spend down.”

LTC Comment: OK, the more you have, the more you’re able to retain. No great insight there. What can we glean from these findings?

ADAP: “Discussion Why are retirees not spending down their assets? There are probably a number of reasons. First, there are the uncertainties. People don't know how long they are going to live or how long they have to fund their retirement from these assets. Then there are uncertain medical expenses that could be catastrophic if someone has to stay in a long-term care facility for a prolonged period. Of course, if people have to self-insure against these uncertainties, they need to hold onto their assets. Second, some of these assets are likely to be passed on to their heirs as bequests. But, what percentage of actual bequests are planned vs. accidental is an open question. Third, another possible reason for this slow asset decumulation rate could be lack of financial sophistication, or in other words, people don't know what is a safe rate for spending down their assets. So, they are erring on the side of caution. Finally, some of it could be just a behavioral impediment. After building a saving habit throughout their working lives, people find it challenging to shift into spending mode. They continue to build up their assets or hold on to their assets as long as possible.”

LTC Comment: Gee, that’s very complicated.  Let me offer a simpler explanation. Decades of academic studies and media reports have convinced the public they will lose everything if they succumb to the high risk of needing long-term care. So, as best they can, people preserve their assets and spend only income. But catastrophic spend down for long-term care is a myth because Medicaid pays for most expensive LTC, exempts most assets, is easy to get after care is needed without spending down assets significantly and only requires income as the patient’s contribution to the cost of care. Consequently, after decades living in retirement, most people at most levels of wealth, spend down very little.

ADAP: “This EBRI study shows that the majority of retirees do not spend down their assets in the first two decades of their retirement. This behavior is not limited to those with lower levels assets. In fact, those with the highest level of assets show the lowest rates of spending down. … When household income of retirees is compared to household spending, the study finds that majority of households indeed limit their spending to their income.”

LTC Comment: This drives home a point I’ve made repeatedly over the years. As much as possible, people retain their assets (for security and/or bequest) and spend only their income. Then, when long-term care becomes necessary, it’s the assets their heirs want to preserve. Heirs have not had the use of their parents’ income so turning it over to Medicaid is no loss. But the assets, including home equity, personal belongings, IRAs, the car, etc. are tempting and easy to preserve. Most Medicaid eligibility workers will explain how to save most assets. Medicaid planning attorneys will show how to preserve the rest.

Closing LTC Comment: Academics pull their hair out trying to explain consumer behavior. For example: why are people more confident about their retirement security than they should be objectively? Why do they spend down less in retirement than logic and asset decumulation models suggest they should? Researchers will never find the answers as long as they cling to their belief in social insurance and the myth of Medicaid spend down.

As people adjust positively to owning their savings (defined contribution plans) and negatively to the impending curtailment of public safety net programs (welfare, Social Security, Medicare and Medicaid), they’re becoming more realistic. They’ll save and insure more and place less and less confidence in government entitlements. The big question is whether the 70-plus-year assault on personal responsibility by public promises of retirement security has gone too far for a healthy private economy to recover. I fear it has.