Retiree surprises and “chunk or nothing”

By Joel Dresang

Apparently, one of the things we have to plan for in retirement is surprises.

Research shows most retirees face something they didn’t expect after they quit their day jobs. Some of the surprises are good. Some not. But the bottom line is to expect the unexpected – and try to be ready to adjust.

And here’s a curious finding: Having a financial professional to help usher you into retirement doesn’t mitigate the element of surprise.

Hearts & Wallets, a research consultant for the financial services industry, found that 84% of tens of thousands of retirees surveyed reported encountering a situation they hadn’t anticipated. Of those who were professionally advised, 83% said they faced surprises.

Of course, surprises aren’t all bad. In fact, the biggest surprise – cited by 43% of the Hearts & Wallets respondents – was that retirees had more time and less stress than they had expected.

The next two surprises were more concerning: 27% said they were forced to live below the lifestyle they had foreseen; 23% had to retire sooner than they wanted.

But even good surprises can be stressful. The couple of times someone threw a surprise party for me, I felt particularly anxious from the shock until I gradually settled down to enjoy the occasion. I witnessed the fleeting panic on my father’s face when my family surprised him with a retirement party. He grabbed my arm as he looked around at all the well-wishers and squeezed my hand as if hanging on for dear life.

Surprises – good and bad – can mess with how we handle money.

For instance, research shows that when someone wins a prize or gets a bonus, they tend to splurge beyond the amount of their windfall. It’s known as “source effect,” part of what behavioral economists call emotional accounting. Source effect explains why someone would spend more freely after gaining money they hadn’t anticipated – and why they might resist cracking into a nest egg they’ve been accumulating for decades.

Since 2010, Hearts & Wallets has found that most retirees are in one of two factions when it comes to tapping retirement funds: “Chunk or nothing.”

“One camp withdraws chunks of money out of necessity or for extraordinary expenses,” explains an article from the Center for Retirement Research, at Boston College. “The other camp withdraws little or nothing, sacrificing a more comfortable lifestyle to their fear of needing the money later.”

So, the source of those retirement savings – earned income saved and invested throughout one’s working days – has an effect on retirees. Because it’s money that took them a lot of time and work to compile and because it’s got to be available for the rest of their lives, retirees tend to either withdraw chunks only when necessary. Or they leave it untouched.

Advisors suggest most retirees could deal with the funds more rationally.

“There’s a sensitive conversation to be had with each individual client about how much they can spend, how much they should spend, what they want to happen when they don’t have the ability to spend any more,” Kyle Tetting said in a recent Money Talk Podcast. “And it’s a fine line. And for every customer, it’s different.”

Dave Sandstrom explains that a lot of his clients just aren’t in the habit of spending. After living within their means their whole lives, they don’t adjust to the fact that their means may have expanded.

“We rarely meet spenders,” Dave said in the same podcast. “If you are a hard-core spender your whole life, you never get to our office. We meet savers, and we get to know savers, and it’s hard for savers to one day wake up after they retire and turn into spenders.”

Mike Hoelzl sees people making bumpy transitions from accruing wealth to enjoying it.

“The conversation I have a lot with people who are just getting into retirement is just finding your level – because obviously, retirement Is a massive life change,” Mike said in the podcast.

And that is where working with a financial professional can come in handy. Advisors can help retirees recognize and respond to the unexpected.

Dave understands the reluctance to spend retirement funds and to rely just on other income such as Social Security benefits and pensions. But he keeps an eye on what clients can afford to spend and offers guidance. Often, he sees retirees who can live more comfortably than they do.

“I spend more time encouraging my clients to actually enjoy some of this money reasonably and in a strategy that works with the final plan,” Dave said, “not to just constantly feel that they have to continually stockpile this money for the event that something might happen a graphisomeday. I think there’s a happy medium.”

Mike also often advises retirees that they can spend more than they think. He added that some learn their limits on their own.  

“A lot of people are going to go gung-ho, and they’re going to spend, and they’re going to travel. They do a lot more things in early retirement because they can, as opposed to later in life, when they can’t,” Mike said. “But it’s interesting to see the people that sometimes shoot out of the gates and then a year or two in say, ‘Oh, wait. We’ve got to pull it back a little.’ And that’s finding the level.”

Kyle encourages clients nearing retirement to keep track of their income and expenses. Even if they don’t need a budget to manage their cash flow, they’ll get a keener sense of how much they’ll be able to spend.

“It’s very much about understanding where it’s going so that you can then piece together what you have to work with besides just the basic needs,” Kyle said.

Of course, some might restrict their use of retirement funds with the hope of leaving more wealth behind, which also needs to be accounted for.

“That’s why it’s so important that we help you walk through what it’s going to mean. If you want to do this, here’s how we can help you structure it; here’s how much you should be thinking,” Kyle said in the podcast. “It isn’t a one-size-fits-all. Everybody has different goals for bequests and for spending, so that’s where we can help with the conversation.”

Joel Dresang is vice president-communications at Landaas & Company, LLC.

(Initially posted June 27, 2024.)