With fewer employer pensions these days, some retirees are hesitant to draw down their nest eggs. However, older Americans may spend more freely with a guaranteed source of income, such as Social Security or a private annuity.

That’s according to a research paper that examines spending in retirement. The report compared retirees with a life-long income stream to those living off an investment portfolio.

The findings suggest retirees with guaranteed income may spend twice as much as those tapping wealth from their retirement savings.

“People don’t like the idea of seeing their nest egg get smaller,” said report co-author Michael Finke, a certified financial planner and professor of wealth management at The American College of Financial Services.

Moreover, the reluctance to spend is common among those with ample savings, even when there’s no desire to pass wealth to heirs, he said. 

Some 67% of private industry workers had access to retirement plans in 2020, according to the Bureau of Labor Statistics. However, many retirees struggle with how to spend their money once they leave the workforce.

While retirees with a clear spend-down strategy tend to be happier, 25% don’t have a plan, according to a BlackRock report. 

“The whole purpose of the 401(k) system is to encourage people to live better in retirement,” said Finke. “But we haven’t really developed a system for allowing them to do that once they retire.”

Although workers may benefit from in-plan annuities, fewer than 10% of workplace retirement plans offered the option in 2019, according to the Plan Sponsor Council of America.

Those worried about outliving savings may consider buying a private annuity offering monthly payments for life.  

For example, let’s say a 65-year-old woman in Tennessee expects to spend $50,000 per year. With $30,000 annually from Social Security, she may want an annuity to cover the remaining $20,000. 

If she wants the income to begin in five years, her premiums may start at roughly $274,000, covering her for life, with no minimum payout or death benefit for heirs, according to Schwab’s Income Annuity Estimator.

However, financial experts say retirees should explore all options before purchasing an annuity.

“They can be extremely confusing for consumers to understand,” said Anthony Watson, CFP, founder and president of Thrive Retirement Specialists in Dearborn, Michigan. “They lack standardization and transparency.”

Before signing up, retirees need to assess their complete financial situation, he said.

“It’s a tough decision and it can’t be made in isolation,” Watson said. “All of these things fit together.”

A retirement spending plan isn’t stagnant. Clients can adjust periodically based on the stock market and other life changes, he said.  

“Often, you can get clients to feel much more comfortable spending down those assets and feeling more empowered to be able to do that,” Watson said.

Another way to boost guaranteed income is by delaying Social Security. Those who wait until full retirement age to collect may receive bigger monthly payments for life, depending on their birth year. Retirees may lock in higher benefits until 70.

For example, let’s say someone was born in 1957 and qualifies for $1,000 per month. If they start payments at 62, they will only receive $725, a 27.5% reduction for life, according to the Social Security Administration.