Will you really run out of money during retirement?

BERLIN, GERMANY - AUGUST 24: Eduard (L), a retired truck and machine driver, chooses groceries with the help of volunteer Brita Blaesing at a food distribution point organized by the Berliner Tafel at the Protestant Church Community Center Lichtenrade on August 24, 2017 in Berlin, Germany. Approximately 300 households rely on the weekly opportunity to pay a symbolic amount for expired groceries donated by local supermarkets and bakeries. Among the needy are Germans, especially pensioners whose pensions are insufficient, as well as migrants, including refugees who arrived since 2015 but also ethnic Germans from the former Soviet Union who came to Germany after 1989. Germany faces federal elections on September 24 and poverty, which has remained stubbornly persistent despite the country's strong economy, is a major election topic. (Photo by Sean Gallup/Getty Images)

(NerdWallet) — Many U.S. households retire without enough money to maintain their pre-retirement standard of living. Once retired, though, people often reduce their spending enough to make their money last, according to a recent study by David Blanchett, head of retirement research at Morningstar, and Warren Cormier, executive director of the Defined Contribution Institutional Investment Association’s Retirement Research Center.

“People are finding a way to make it work,” Blanchett says.

The findings challenge a common financial planning assumption that retirees’ spending will increase at the rate of inflation each year. But the research also indicates many people retire without a realistic understanding of how much they can safely spend.

Running out vs. running short

The fear of running out of money is pervasive in the U.S. Nearly half of Americans have this concern, according to the 2019 Aegon Retirement Readiness Survey. And their worries may be well-founded. A 2012 paper for the National Bureau of Economic Research found 46.1% of older adults died with less than $10,000 in financial assets.

Of course, the phrase “running out of money” is somewhat misleading. The vast majority of U.S. retirees receive Social Security benefits, which continue for life. So while they may run through their savings and run short of money, they can’t truly run out.

Still, few people relish the idea of having to cut back sharply on their spending in retirement or eking out an existence on $1,543 a month (the current average Social Security check).

Spending less slows the burn rate

Blanchett and Cormier studied 425 U.S. households that had at least $10,000 in savings at retirement and $5,000 in annual Social Security benefits. They found only 18% retired with enough money to maintain their standard of living.

Over time, though, most of the households reduced their spending and slowed how quickly they were burning through their savings. After 10 years, the proportion with sufficient funds to last their retirement shot up to 48%.