An idealized retirement story might sound like this: Saving for years, retiring from work, then taking planned withdrawals on through retirement. It sounds orderly and easy, yet many retirees know it is anything but.
Emergencies arise, not only in a retiree’s life, but also in the lives of loved ones. Ordinary life includes a leaky roof, a needy middle-aged son or daughter, or a troubled grandchild. If retirees have savings, even if they rely on them for monthly living, there is the ever-present urge to liquidate savings and put some money on the problem.
An Ugly Trick
There is an ugly trick with the urge to be generous, and it’s subtle.
When persons withdraw unplanned amounts from savings, they also reduce their future income. It doesn’t work that way with salary or other earned income, so it is something almost no one experiences or gets accustomed to before retirement.
When working, a person can indulge an emergency by withdrawing from saving, by cutting consumption, or by borrowing money. In middle life savings are often explicitly held for emergencies. Also, there are often plenty of working years ahead during which a steady salary, periodic raises, and small adjustments in lifestyle can help recover lost ground.
When living on accumulated savings, however, it is the entire portfolio that is earning income and providing for withdrawals. If regular withdrawals are not reduced to compensate for extra emergency spending, then it suddenly becomes less likely that the savings will last through retirement.
It is not possible to see, touch, or smell “less likely,” so the problem can be especially insidious. The problem may occur whenever retirees rely on portfolio income, even if they also have Social Security or pension income.
Setting the Stage for Tragedy
It Is easy to construct examples where helping a relative reduces a portfolio by 25 percent, 30 percent, or more. If retirees reduce their withdrawals by the same percentage, the story may end well enough. But if they are on a tight budget, making it hard to reduce spending, then real tragedy may slowly gather as their portfolio declines.
Compounding things, relatives fed once often return. Dependency can be a pattern. The problem is more acute now in a slow economy, especially considering stories about a declining middle class. Even if the emergency involves the retiree, another one may lurk in the years ahead.
What to do? The next Later Living post will offer ideas.