AS I WAS PREPARING to retire last year, I spoke with a number of friends who were also about to leave the workforce. One of the main topics of discussion: How could we best arrange a stream of income for the next three decades or so?
Among my friends, a common refrain was that they planned to spend more in their first decade of retirement. They thought their spending would fall during the second decade, because they figured they’d grow less mobile.
This fits the spending pattern of many retired Americans. Just Google “retirement spending smile.” It has nothing to do with your teeth. Rather, it’s the notion that recent retirees spend more on travel, eating out and other discretionary items. As they age, they cut back on some of these discretionary items. At some point, however, health care costs start rising, causing spending to increase again.
I don’t doubt the data—this is what many retirees experience. But I was concerned about cause and effect. Did retirees decrease their spending because they were running out of funds or were concerned that they might? It seemed intuitive to me that, given a choice, most people would prefer to continue spending at a higher rate.
Lo and behold, some smart academics at Boston College’s Center for Retirement Research decided to look into the retirement smile. Anqi Chen and Alicia H. Munnell analyzed almost 20 years of spending by retired Americans.
What did they find? Yes, the average retiree’s spending decreases about 0.7% to 0.8% annually. Over 20 years, the compound impact would lower retiree spending by perhaps 13%. But among retirees who were wealthier and healthy, spending declined at less than half that rate, just 0.3% per year. After 20 years, they’d spend about 6% less.
This suggests that people prefer to keep their spending more constant. That may not be possible if they don’t have sufficient retirement funds. Also, if they’re in ill-health, they may not feel like spending on discretionary items or, alternatively, they may have deliberately spent more when their health was better and are cutting back now that they’re less healthy.
I’m retired now. It’s too late to add to our retirement funds. But I am focused on eating well and exercising—so I’m healthy enough to spend what we’ve socked away.
this : “I’m retired now. It’s too late to add to our retirement funds. But I am focused on eating well and exercising—so I’m healthy enough to spend what we’ve socked away.” EXCELLENT, thank you
Health is a major factor, and isn’t always in your control. No amount of exercise and healthy eating would have prevented my rheumatoid arthritis from coming out of remission. The result is less spending overall, as travel spending stopped and medical spending increased but not to the same level. However, my spending will go up permanently next year when I move to a CCRC.
6,000 bucks for a water heater?? I want to be that guy’s plumber! 🙂
That’s the going rate here, mostly because they are in a condo closet and they have to be specially fitted.
Wow Dick that seems high but I guess you gotta pay to play wherever you live … I had a 40 gallon gas short tank replaced recently for 900$ here in western Penna. Would have done it myself for 700 but didn’t want the hassle
Yes, yes, yes. I have been trying to convince people for years that planning retirement on the assumption of declining spending is a big mistake.
I have been retired 12 years, I am 78. Our spending is different now, but not less. In the last two years we have spent less on travel, but that was made up by some medical and dental bills – $8,000 for one tooth for example.
Stuff happens, my retired neighbor just got hit with $9,000 to fix AC and another with $6,000 for a new water heater.
Then there is inflation and perhaps the desire for more discretionary spending – like for family.
For the 20-year period from 1999 to 2019 modest inflation more than offset the 13% – by a lot.
Given a choice, good health for you and your significant other, especially in retirement, is preferable. You can strongly influence that choice with your middle-aged lifestyle.