12-04-2018, 07:47 PM
The June'18 issue of the AAII Journal has an interesting article about observed spending/withdrawal habits of retirees across 2 different types of people: Spenders and Savers. If you have AAI subscription and haven't had a chance to read the Grasshoppers and Ants in Retirement - please consider taking a look.
The gist of the article is that, those who have developed a life-long habit of thrift and made spending sacrifices during their work years in order to live better in retirement, find it hard to break the habit of frugality, and are likely to spend much less than what they can afford to in their retirement. This is especially puzzling for people who do not have a desire to leave a bequest. On the other hand, people who have lived a relatively lavish life during their working years do a better job in smoothing down their spending pattern from working-life to retired-life, and exhibit better "economically rational" consumption pattern. The article suggests that the habitual savers should feel relived that they are unlikely to outlive their asset, and have saved enough to dial-up their consumption pattern to a level of the typical "spenders".
Note that the article uses the terms Ants and Grasshoppers (to imply thriftier vs spenders) to draw parallel from the Aesop's fable. I personally find the analogy misleading, because unlike the Grasshoppers in the fable, the "spenders" being discussed in the article are not necessarily irresponsible spenders who make no future plans. I think "Habitual Savers" and "Responsible Spenders" are more appropriate names for the purpose of the article.
The article is based on a survey from Health and Retirement Study, using a sample of 20000 households over several years. The comparisons are done across similar asset/income categories. A Grasshopper is identified as a household who demonstrated significantly higher spending than the financial model suggests. A few interesting observations:
Old habits die hard!
So, if you are already retired, are you an Ant or a Grasshopper in your retirement? If you are still working, are you an Ant or a Grasshopper now, and do you think you will transition to the other camp at retirement?
The gist of the article is that, those who have developed a life-long habit of thrift and made spending sacrifices during their work years in order to live better in retirement, find it hard to break the habit of frugality, and are likely to spend much less than what they can afford to in their retirement. This is especially puzzling for people who do not have a desire to leave a bequest. On the other hand, people who have lived a relatively lavish life during their working years do a better job in smoothing down their spending pattern from working-life to retired-life, and exhibit better "economically rational" consumption pattern. The article suggests that the habitual savers should feel relived that they are unlikely to outlive their asset, and have saved enough to dial-up their consumption pattern to a level of the typical "spenders".
Note that the article uses the terms Ants and Grasshoppers (to imply thriftier vs spenders) to draw parallel from the Aesop's fable. I personally find the analogy misleading, because unlike the Grasshoppers in the fable, the "spenders" being discussed in the article are not necessarily irresponsible spenders who make no future plans. I think "Habitual Savers" and "Responsible Spenders" are more appropriate names for the purpose of the article.
The article is based on a survey from Health and Retirement Study, using a sample of 20000 households over several years. The comparisons are done across similar asset/income categories. A Grasshopper is identified as a household who demonstrated significantly higher spending than the financial model suggests. A few interesting observations:
- Amongst the entire sample, 15% were identified as Grasshoppers (based on their consumption pattern before and after retirement)
- On average, Grasshoppers spend 10K/year more than Ants in retirement. The difference in spending between working years and retirement years falls much faster for Grasshoppers.
- Wealthiest 20% Grasshoppers spend up to 140K in retirement, compared to about 80K for wealthiest Ants.
- Grasshopper tend to spend more on non-durable consumptions (vacation, auto, hobbies, etc.).
- When a windfall (e.g. inheritance) is received in retirement, Grasshoppers tend to spend about quarter of the windfall amount each year, and end up consuming it in 4 years. Ants on the other hand consumes only 0.5% of the windfall amount per year - almost a negligible increase.
- When additional "guaranteed income" (annuitized income) is available, Grasshoppers spend 40% of the additional guaranteed income, compared to 17% for Ants.
Old habits die hard!
So, if you are already retired, are you an Ant or a Grasshopper in your retirement? If you are still working, are you an Ant or a Grasshopper now, and do you think you will transition to the other camp at retirement?