Is Underspending a Fiduciary Problem?

Michael FinkeThere is debate about whether fees or commissions lead to better outcomes for retirement savers. But one aspect that hasn’t been discussed enough is that the loss of welfare from underspending is likely much higher than from choosing one or the other fee method.

Unspent savings is an ignored fiduciary problem.

In his amazing book on retirement-income analysis, Bill Sharpe evaluates retirement spending strategies using a pie chart that shows how big a slice goes to spending, bequests, and fees. For the portion of a client’s savings devoted to lifestyle, the goal is to maximize what goes to spending. But a conservative fixed-withdrawal strategy such as the 4% rule leaves too much to unintended bequests. And because assets are inefficiently large for many luckier retirees later in life, it also results in higher fees for managing these assets.

Most respondents in consumer surveys don’t indicate a strong desire to pass money on to others after they die. But most of them die with a lot of assets and money in the bank. Economists refer to this phenomenon of leaving unspent retirement joy on the table as “unintended bequests.” There are a lot of studies on unintended bequests that try to figure out why people leave so much of their wealth to others without wanting to do so.