David McKnight explores a retirement planning phenomenon that almost nobody discusses, but that has been documented repeatedly in academic research.

It's the idea that when retirees convert some of their savings into guaranteed lifetime income through an annuity, they actually spend more money and enjoy retirement more than those who rely on their liquid retirement savings alone.

Even though many people assume that doing so would make retirees more conservative with their spending, research actually shows the opposite.

According to academic studies, when retirees have reliable lifetime income, they actually feel more comfortable spending money.

Moreover, when retirees rely purely on investment accounts for income, they often underspend even when they have more than enough money to support their lifestyle.

One of the findings of David Blanchett's and Michael Finke's License to Spend research has found that retirees treat guaranteed income very differently than they treat investment portfolios.

In some cases, those who have money sitting in investment accounts – rather than guaranteed income – spend about 40 to 50% of what financial models say they could safely withdraw from their portfolios.

Behavioral economics, and the so-called loss aversion, more specifically, highlight the fact that human beings are wired to fear loss more than they value gain.

David notes that guaranteed lifetime income annuities can actually increase the amount retirees spend and enjoy during retirement.

David breaks down the concept of the Retirement Consumption Puzzle.

People are comfortable spending income but are terrified of spending principle.

In other words, if you give someone a monthly payment, they treat it as income and spend it freely.

On the other hand, if you give them a large investment account and tell them to withdraw money from it each year, they all of a sudden become cautious and tighten up the purse strings.

When it comes to the stock portfolio, David suggests allocating 70% to a total U.S. stock market index and 30% toward a total international stock market index – and rebalance every time that allocation gets more than 5% out of whack.

Mentioned in this episode:

David's new book, available now for pre-order: The Secret Order of Millionaires

David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track

Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight

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