Why so Many Wealthy Retirees Hoard Their Nest Eggs

Bob and Sophia Radlowski of Chicago retired a decade ago and live off roughly $8,000 a month in Social Security and pensions. They have resided in the same three-bedroom house since 1979 and drive older cars.

The couple has a seven-figure retirement nest egg, but they rarely touch it and it has grown since they stopped working.

"We're living the way we want to," explains Bob Radlowski, 75. "There's no desire to live higher on the hog. We've been doing it so long, we're used to doing it economically."

Sophie Radlowski, 73, adds that she and her husband came from working-class families.

"Both Bob's mother and my mother were savers, and they stayed that way," she says. "They left us a little bit of money and I'm really proud of it. They were savers and it rubbed off on both of us."

Americans retirees could spend more money-often far more money-than they do, according to financial experts. There are a multitude of reasons why they don't.

The advent of 401(k) savings plans transformed everyday workers into pension plan managers, and many underspend in retirement because they fear market downturns. Other are saving money in case they need long-term healthcare. And yet others like the Radlowskis, who have ample money salted away for anything that should come up, are simply used to watching their pennies-and like it that way.

For Prudential Financial's David Blanchett, a frugal retiree is like the ant in The Ant and the Grasshopper, the classic Aesop fable about planning for the future. The ant spends the summer gathering food for the coming winter while the grasshopper makes merry.

"It's hard to make an ant into a grasshopper," says Blanchett, head of retirement research. "You go from saving money diligently for 30 or 40 years, and all of a sudden you go to spending that."

Retirees tend to underspend regardless of their income. Vanguard Investments studied retirees who had $1 million or less in retirement savings.

"Four in 10 people don't touch anything from their retirement accounts until they get to the RMD (required minimum distribution)," says Kelly Hahn, who heads retirement research in Vanguard's investment strategy group.

"And the remainder, about half, they are tapping their retirement accounts as they go, whenever they need the money. So they're using as it as a sort of piggy bank."

Adds Kelly: "People are just really kind of hoarding their wealth, and doing what they have do from a tax standpoint, which is taking out RMDs."

Many wealthy retirees underspend, too.

John Schulties, a 79-year-old who splits his year between homes in Florida and Minnesota, has watched his wealth roughly triple since he retired 20 years ago. Today, he has about $30 million.

"Yes, it comes in faster than I'm spending it," says Schulties, who estimates he spends $400,000 to $500,000 a year. "My wife and I are buying everything we want buy, and doing everything we want to do."

Schulties and his wife have bought houses for their children. They don't want a giant yacht. And they don't travel much anymore because they don't feel like it.

"My wife and I have become homebodies," he says. "Neither of us like hotels."

Michael Landsberg, the financial advisor for the Schulties, says: "It may be a generational thing. Some people that are younger and have this wealth, they seem to move their lifestyle up. They're looking at a private jet and super expensive cars."

Landsberg goes on. "I have a lot of clients that are happy where they are. And they have no interest in moving up."

The financial industry has new tools to encourage retirees to spend.

JP Morgan offers a product called SmartRetirement Lifetime Income to retirement plans that allow workers to convert a portion of their savings to a regular "paycheck" as they approach retirement.

The bank's research found that those who depend largely on withdrawals from their retirement savings spend less than those who receive a high percentage of their income from fixed sources like Social Security, pensions or annuities.

Whether many workers will opt for JP Morgan's product isn't clear. The insurance industry has sold low-cost income annuities for decades, but most workers don't want to permanently let go of a sizable chunk of money to buy them.

JP Morgan's SmartRetirement Lifetime Income tries to offset this reluctance by allowing workers to get the remainder of their savings balance back if they change their mind.

Workers might need more nudging to get on board. Retirement savings rates have climbed as more companies have savings plans where new workers are automatically enrolled-unless they opt out.

Similarly, companies could offer savings plans that automatically enroll employees in products that offer guaranteed income as they near retirement, says Michael Conrath, chief retirement strategist for J.P. Morgan Asset Management.

The challenge is that the financial industry is trying to bend human behavior.

"A lot of it comes from this fear of spending," Conrath says. "For so long, with good intentions, tremendous effort was made to educate people on saving and hitting a target. And now they are going to spend, there is this reticence that kicks in."

And financials advisors often find themselves pushing their clients to spend in retirement.

Carolyn McClanahan, a former emergency room doctor who is now a financial advisor in Jacksonville, Fla., works with clients to understand their spending needs and to create paycheck-like regular withdrawals from their portion.

McClanahan has seen some extreme underspenders. She had one client who retired with $5 million and wasn't spending any of it and was probably going to see her nest egg grow sharply before she died.

McClanahan told her: "At the rate you're going, you're going to die with $38 million." The woman loosened up, began giving more to charity and to her family.

Not everybody thinks frugal retirees are a problem.

Susan Elser, an Indianapolis financial advisor, says she is a saver and tends to attract clients with her view. Some keep working after they could afford to retire so that they won't "touch their investments," she says.

"We work with a lot of what I call the multimillionaire next door that enjoy the benefit of having money a lot more than they enjoy spending it," Elser says. "Our clients would tell the best about having money is the peace of mind that money provides."

In the case of Sophie and Bob Radlowski, they don't feel as it they're denying themselves anything.

"The race to spend it before you die doesn't hold any water for me," Bob Radlowski says. "If I want to spend it, I will. If there's a big chunk left, I will pass it on to the kids."

Their financial advisor, Ed Gjertsen, has many frugal clients who are never going to become big spenders, too. "We never try to change someone's money DNA," he says.

When Gjertsen worked with the Radlowskis, he showed them they had the money to travel more, and they have. The couple just got back from a car trip to Winnipeg, Canada. They're planning a much more expensive trip in December-to Egypt that includes a Nile cruise.

Bob Radlowski pipes in: "We're not going to Paris for the $500 fancy dinner. I have to get value for what I spend."