From Retirement Now Newsletter March 11th 2021

Are retirees under-spending in retirement?

Today I wanted to discuss an interesting article about how real-life retirees actually spend their money in retirement and why this is so important to not only retirees, but especially to people that plan on retiring within the next 5-10 years.

The Financial Planning Association put out an article called Right-Sizing Retirement: Exploring the Retirement Consumption Gap in Early Retirement.

I say it’s an “interesting article” because what they discovered in their research tends to go against some existing retirement planning assumptions you may have come across when planning for your retirement.

Using actual data of retirees’ behavior, they discover that retirees spend less in the first 10 years of retirement compared to what they spent during their working years. It seems that over a 10 year period after retiring, spending amounts dropped by about 2% each year.

At that rate, 2% each year becomes lower spending of about 20% after 10 years.

This seems appropriate for people that retired with too little in assets to support them in retirement at their current (pre-retirement) spending levels. They essentially reduce their spending to be in line with what they can afford. This is what the data showed.

The odd thing is the data seemed to also indicate that retirees who had more than sufficient assets to cover their current (pre-retirement) spending levels, also reduced spending over the following 10 years of retirement.

Is it because they are playing it safe? Want to leave a bigger inheritance to their kids or charities? Preparing for uncertain future medical expenses, just in case?

The researchers are not 100% sure why. It’s speculation as to the cause. And every retiree probably has their own reasons driving their decisions. But I’ve personally seen this phenomenon play out with others. It’s interesting to see actual data that is in line with my anecdotal experience.

Why this is important to current retirees

 A common feature of retirement planning is forecasting spending needs into the future. And this is often done by taking current spending amounts, and then assuming they will go up by inflation every year into the future, usually a 3% inflation adjustment.

This causes forecasts to show higher spending every year in retirement, which goes against what the researchers discovered looking at their real-world data.

The result: a person could unnecessarily delay their retirement because they may feel they have not saved up enough to retire yet because their projected spending needs keep getting bigger and bigger every year.

My two cents: I think forecasting retirement spending needs is still a good exercise to go through. It gives a good baseline to work from on determining what level of spending is needed in retirement. And hence a good baseline to determine what level of retirement savings should be targeted before finally pulling the trigger and giving that 2 weeks notice.

But flexibility that deviates from the plan is important too. As well as ongoing adjustments throughout retirement to stay within the right spending targets to help avoid running out of money.

Not to mention that the process of “cutting back” in retirement that the researchers discovered in their study, is probably a painful process for many people. One that could potentially be avoided with proper planning.

That’s it for this week’s newsletter. If you have any retirement questions, feel free to reply to this email and you may see your question mentioned in a future issue.


Chris Hammond

P.S. We specialize in helping retirees (and those retiring in the next 5-10 years) determine how much they need to save, how to invest and manage withdrawals from their portfolio in retirement to not run out of money, and help them lower their taxes throughout their retirement years.

Click here to schedule a call and start planning for your retirement now.