How Do Your Spending Levels Rise and Fall During Retirement?

Are you planning to spend more money or less money once you retire?

Many retirees would answer, "About the same," and that makes sense. Folks figure that what they end up saving in professional expenses (commuting, meals, work clothes) and childcare, they'll shift over to things like taking vacations, joining their local country club, and some quality-of-life upgrades around the house. Sure, inflation will drive up the cost of some goods and services by a percent or two every year. But most seniors aren't looking for a lifestyle upgrade in retirement, and they want to avoid any serious downgrades. Maintaining the status quo, with a few well-earned splurges here and there, sounds like a dream.

Financial professionals and economists used to assume consistent spending was, more or less, a likely retirement scenario as well. But decades of research and analysis have uncovered a "retirement consumption puzzle." Most new retirees actually spend less money than they did while they were working. Retiree spending rates then continue to decline throughout retirement, even as inflation keeps pushing consumer prices upwards.

Let's break down the retirement consumption puzzle piece by piece and explore how Keen Wealth's comprehensive planning process can help folks assemble a reliable retirement spending plan.

The 4% "Myth"

The concept of the retirement consumption puzzle was popularized by David Blanchett, PhD, CFA, CFP?, currently the Managing Director, Portfolio?Manager,?and Head of Retirement Research?for?PGIM DC Solutions.

When he was working at Morningstar, Blanchett conducted a comprehensive study of U.S. government data on retiree consumption and concluded, "The basket of goods and services consumed by individuals is not constant over time." While inflation did indeed increase the total cost of that "basket," retirees filled it about 1% less every year.

Blanchett's findings upended assumptions about consistent retiree spending that had existed since at least the 1990s when The 4% Rule started making the rounds. If retirement spending was going to change over the course of a decade or two, then how could retirees use one number to calculate what they were going to spend year after year, especially if the ROI from their retirement accounts wasn't linear either?

Time has gradually exposed another major flaw in these outdated retirement spending strategies: the baked-in assumption that retirement for baby boomers was going to be the same as retirement was for their parents and grandparents. The "Peak 65" wave of new retirees are working longer, staying healthy longer, and living vigorous and adventurous lives. No one number is big enough to keep pace with the dynamic new vision of retirement that, I believe, is going to become the norm for more and more boomers, as well as their children and grandchildren, in decades to come.

Your Retirement "Smile"

"Two notable changes in average consumption occur as households age," wrote Blanchett. "The relative amount spent on insurance decreases significantly at older ages, and the relative amount spent on health care increases significantly at older ages. Medical care expenses represent approximately 10% of total expenditures for a 65-year-old household but increase to approximately 20% percent by age 85."

Those figures have only ticked up in recent years. COVID is part of that equation, but so too are advances in health care and longevity trends. Research also shows that inflation pushes up the cost of medical care more than it does other items in retirees’ consumption baskets. That includes both typical annual increases in Medicare premiums as well as the costs of services like in-home nursing that Medicare doesn't cover.

For many seniors, this combination of decreased consumer spending giving way to increased healthcare spending creates a curve: a "retirement spending smile" that dips at the start of retirement as you spend less on stuff and rises at the end as you spend more on health care.

At Keen Wealth, we break that curve down into three broad stages as part of our process for developing personalized retirement spending strategies:

• Go-Go Years: Approximately the first 10 years of your retirement. You're spending around 1% less every year on your monthly budget, but you might be offsetting some of those savings by having fun and tackling your bucket list. You also might be topping off your nest egg by working part-time.
• Slow-Go Years: In the second 10-15 years of retirement, spending on consumer goods continues to decline by 1% per year, and so too does discretionary spending on travel, sports, and entertainment. You're probably done working, and you might be scaling back some physically demanding activities. If you're in good health your medical spending might not be climbing yet, but you might consider devoting a big chunk of your nest egg to one or two big trips or to moving closer to your family.

• No-Go Years: Most folks will spend the last decade or so of retirement settled in somewhere comfortable and convenient, often in the company of loved ones or other seniors. At this stage, medical expenses and legacy planning will become an important focal point of your comprehensive planning process.

Avoid a Retirement Frown

I think the final missing piece in solving the retirement consumption puzzle that isn’t talked about enough is the power of choice. In his retirement spending study, Blanchett admitted, “What is less clear, though, is whether the reduction in expenditures is by choice or by need.” Folks who don’t have a retirement plan often find that many financial decisions are made for them. Retirement becomes defined by the things they can’t afford to do or the things that they’re afraid to do because they’re worried about running out of money.

Comprehensive financial planning can make the difference between spending less in retirement because you want to and spending less because you have to. The guidance of a financial advisor can also help you make the transition from a “saving mindset” to a “spending mindset” so that your nest egg doesn’t just support you – it gives you the resources to thrive in your Golden Years.

Get in touch, and let’s discuss how Keen Wealth can help you solve your retirement spending puzzle.

About Bill

Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast?Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on?LinkedIn?or visit?www.keenwealthadvisors.com.

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