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.