Until then, a top concern is not running out of money in retirement, and having enough to pay the bills and enjoy leisure activities.
But there will come a time, if not a specific day, when you believe your personal hourglass is beginning to run out of sand. Your time on earth will then look very, very finite.
At this point, people look less at current expenses. Instead, they tote up their retirement wealth and see how it spreads over the years they are likely to have left.
Medical expenses and legacy issues move to the forefront. Medical expenses are up there because they often are the big unknown wild card in retirement spending. Legacy issues are activated because people can get a better line of sight into how much money will be available to leave to heirs or donate to important causes.
There is no “average” decision path here but there is good guidance at how our elders have wrestled with these issues. A recent economic analysis of how medical expenses and legacy issues interact in our later years is helpful. Mariacristina De Nardi, Eric French, John Bailey Jones, and Rory McGee have attempted to address the topic of “Why Do Couples and Singles Save During Retirement?”
To do so, they looked at mountains of data on the past spending decisions of thousands of older people. I risk making errors in providing general characterizations of their work, but of course that is exactly what I’m about to do. Please read their paper, particularly for details on how people in different income and wealth groups approach this matter.
“The interaction of medical expenses and bequest motives is a crucial determinant of savings for all retirees,” they write. “Hence, to understand savings, it is important to model household structure, medical expenses, and bequest motives.”
Couples differ from singles:
“Being in a couple allows its members to pool their longevity and medical expense risks, potentially reduces medical spending due to spousal care giving, but also exposes each member to their spouse’s risks, including the income loss and high medical expenses that often accompany a spouse’s death. A couple also cares about leaving resources to the surviving spouse, and potentially about leaving bequests to other heirs.”
More affluent couples are able to self-insure for their future health expenses. This causes them to be cautious about spending down their assets. For the same reason, they tend to squirrel away money for whichever spouse lives the longest. The death of a spouse is a watershed event for many reasons.
The surviving spouse is most often the wife, given longer longevity for women in general and the frequency with which women marry men a few years older then they, and sometimes much older. When a spouse dies, household income usually drops, often by a lot more than household living expenses.
Leaving money behind for the surviving spouse or other uses thus becomes more important here than being able to pay for medical expenses. As household wealth declines, so does the relative weight of what the authors call “bequest motives.” And while you’ve probably never thought of legacy giving in this way, it is viewed in economic terms as a “luxury good.”
“On average, the wealth of households experiencing a death declines by an additional $160,000 compared to those not experiencing it,” the study found. “While the decline begins up to six years in advance of death, a substantial share of the decline occurs in the ﬁnal two years. . . . A large share of this drop is explained by high medical expenses before death, but not the majority, which is accounted for by transfers to non-spousal heirs. By the time the second spouse dies, much of the couples’ wealth has vanished.”
The impact of medical expenses on household wealth in later years is not great. But it has an outsized role here due to the uncertainty of such spending. To plan for this unknown, people practice “precautionary saving.” This boosts the odds they will die with money left over for distribution to their heirs and charities.