The spending problem most great savers don't see coming

Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

A quiet moment on a Tuesday call

Marcus went quiet during a meeting recently.

He is 55, a facilities manager for the county, and he has 28 years in PERS 2. He and his wife have done everything right. They maxed the DCP for years. They saved outside of it too. On my screen, the plan looked healthy. More than healthy.

So I told him the truth. His plan could support a good deal more spending than he was doing now.

That is when he got quiet.

Then he said, “But what if something happens?”

I have heard some version of that sentence more times than I can count. And it almost always comes from the people who are in the best shape to retire.

The savers have the hardest time

Here is the part that surprised me when I first started paying attention to it.

The clients who struggle most with spending are usually the ones who saved the best. Decades of the same habit. Save, and then save a little more. That habit does not switch off the day you retire.

The numbers here are almost hard to believe. Following the well-known 4% rule, retirees finish with more than double their starting wealth in about two-thirds of historical scenarios, and they are more likely to end up with five times what they started with than to end up with less1.

Most diligent savers never come close to running out. They are far more likely to reach the end with plenty left over and a long list of things they never let themselves do.

Why this hits Washington public employees harder

If you are in PERS, SERS, TRS, LEOFF, or PSERS, you have something most private-sector savers do not. A pension.

Your Plan 2 or Plan 3 pension pays a guaranteed monthly benefit for the rest of your life2. That is a paycheck that shows up whether the market is up or down.

And that quietly changes the math. Research from the Employee Benefit Research Institute found that retirees with pension income held onto their assets far more tightly than those without one. Pensioners' assets fell only about 4 percent over 18 years, compared with 34 percent for everyone else3.

So the pension that gives you security can also make you too careful. Your bills are already covered by the pension and Social Security. Your savings just sit there. And for a lot of public employees, that money never gets used for the life it was meant for.

Why “enough” keeps moving

Brian Portnoy, a behavioral finance writer, draws a distinction I come back to often.

Being rich is the pursuit of more. Ask someone with a million dollars what “enough” looks like, and they will usually say two. Get to two, and the number becomes five. The finish line keeps moving.

Wealthy is different. It means having enough to fund a life that actually matters to you. The kind of life you would design for yourself if no one else were watching.

For most of the public employees I work with, that life is not extravagant. It is more time with the grandkids, or the cabin near the water they have been talking about for years. Often the things that matter most cost the least.

The same fear shows up in your portfolio

That instinct to protect what you have does not stop at spending. It shows up in how people invest, too.

A properly diversified portfolio always has something lagging at any given moment, and the temptation is to react to whatever is down. Portnoy put it memorably once: diversification means always having to say you're sorry4. Learning to sit with that discomfort, instead of bailing on a sound plan because one piece is underperforming, is the same muscle that lets you spend with confidence later.

What actually helps

I don't have a trick that flips the switch. But a few things move people from scared to spend toward comfortable.

Name it out loud. Knowing that great savers commonly feel this way takes some of the shame out of it. It is normal. In a way it is just what happens after doing the hard thing well for 30 years.

Run the numbers with someone. There is real clarity in seeing your pension, your Social Security, and your savings laid out together as one paycheck. Most of the fear lives in the gap between what people assume and what the plan actually shows.

Write down what your version of “enough” looks like. Not dollar figures. The experiences. Once it is on paper, it stops being a vague someday and becomes a plan.
Then practice. This is the one that stays with me. You don't have to wait for the retirement date to start living a little. If you plan to retire at 58, start leaning into that life at 55.

Where to start

There is no 30-day plan here and no urgency. This is a slow shift, and it should be.
Pull your most recent pension estimate from your DRS online account so you know your real number. List the two or three things you would actually want to spend on if you gave yourself permission. And if a specific “what if” is what holds you back, bring that worry to a planning conversation and stress test the plan against it. See what actually happens.

Marcus is still working through it. But on our last call, he mentioned he and his wife finally booked the trip they had been postponing for six years.

That is the whole point.

​Sources
1. Kitces, Michael. “The Consumption Gap In Retirement: Why Most Retirees Will Never Spend Down Their Portfolio.” Nerd's Eye View, Kitces.com. https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/
2. Washington State Department of Retirement Systems. “Choosing Plan 2 or Plan 3.” https://www.drs.wa.gov/choice/
3. Employee Benefit Research Institute. “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?” April 3, 2018. https://www.ebri.org/content/asset-decumulation-or-asset-preservation-what-guides-retirement-spending
4. Portnoy, Brian. “Diversification Means Always Having To Say You're Sorry.” Forbes, March 9, 2015. https://www.forbes.com/sites/brianportnoy/2015/03/09/diversification-means-always-having-to-say-youre-sorry/

-Seth Deal