Guaranteed Income: A License to Spend

We explore how the composition of retirement wealth is related to retirement spending and find that retirees who hold a higher percentage in annuitized income spend more than retirees with an equal amount of non-annuitized wealth. This result is consistent with traditional economic theory that predicts risk-averse retirees who do not know how long they will live should spend less than retirees who hold an equal amount of annuitized wealth, and with behavioral framing preferences that may make retirees more comfortable spending from income than assets. Marginal estimates indicate that investment assets generate about half of the amount of additional spending as wealth held in guaranteed income, which means that retirees could spend substantially more each year in retirement if they shift investment assets into guaranteed income wealth. The size of the effect suggests that the explanation for under-spending non-annuitized savings is likely both a behavioral and a rational response to longevity risk. A survey conducted to test behavioral preferences toward income finds that 59.4% of respondents would feel more comfortable spending on nonessential activities if given $10,000 of additional income rather than $140,000 of wealth.