Our topic on this episode of the Ready for Retirement podcast is about understanding how much people actually spend in retirement.
Questions answered: What do people actually spend in retirement and how much does it differ from what they anticipate? What planning can I do now to ensure I don’t outlive my money? What is the best approach for my individual situation?
Are you ready to start focusing on the things that truly matter when it comes to your financial future?
Key Points
- Retirement expenses
- Understanding your retirement expenses needs to be done on the front-end to ensure you can enjoy a meaningful and clear retirement.
- How do people tend to calculate retirement expenses?
- People tend to anticipate what their expenses will be in the first year of retirement and inflate this number each year by a historical inflation rate of your choosing.
- Exploring the Retirement Consumption Puzzle
- David Blanchett – Exploring the Retirement Consumption Puzzle
- David’s research looks at viewing retirement expenses differently.
- CEX (Consumer Expenditure Survey) takes into account how retirement expenses change over time.
- How do inflation and expenditures impact your ability to retire ?
- CEX (Consumer Expenditure Survey) takes into account how retirement expenses change over time.
- Research findings
- David’s study monitored people’s general expenses (food, clothing ,etc.) from ages 25 – 85.
- Inflation as a whole increases at a rate of return by the Consumer Price Index (CPI).
- However, a retiree’s expenses are rather different from someone who is in their mid-30s.
- Inflation as a whole increases at a rate of return by the Consumer Price Index (CPI).
- Inflation for retirees is higher compared to the average consumer, primarily due to medical expenses.
- (CPI-E) is going to weigh things such as medical care more heavily as compared to younger individuals and this is seen as a more appropriate index for retirees.
- The costs of goods and services that retirees spend money on increase faster than the goods and services of individuals who aren’t in retirement.
- David’s study monitored people’s general expenses (food, clothing ,etc.) from ages 25 – 85.
- How does retirement spending change over time?
- Expenditures
- From age 65- 85, the general trajectory of spending shows it decreases by 1%- 2% in “real terms”.
- Ex: Assume you’re retired and you spend $100 on groceries.
- If inflation increases by 3%, you would spend $103 on groceries to buy the same amount of groceries.
- In reality, this 3% number starts to decline and by the early-mid 80s, individuals spend 85% of what they originally spent in their first year of retirement.
- Ex: If the average retiree is spending $100,000 at age 65, by age 80, this retiree is spending $75,000 – $80,000/year.
- Although inflation is rising, history shows us the actual rate of expenditures decreases at the same time.
- Ex: Assume you’re retired and you spend $100 on groceries.
- From age 65- 85, the general trajectory of spending shows it decreases by 1%- 2% in “real terms”.
- Expenditures
- Three-phase retirement
- Michael Stein (book) – The Prosperous Retirement: Guide to the New Reality
- Michael views retirement in three phases:
- Phase 1: Go-go years.
- Phase 2: Slow-go years
- Phase 3: No-go years.
- If you back out medical expenses, expenditures from the time you retire decrease year-over-year.
- Retirement expenses begin to increase when medical expenses come in.
- Michael’s book explains although medical expenses increase the cost of retirement, expenses tend to still be less than anticipated in comparison to the first year of retirement.
- Michael views retirement in three phases:
- Michael Stein (book) – The Prosperous Retirement: Guide to the New Reality
- The Retirement Spending Smile
- Retirement expenses are at their peak when you retire.
- Expenses decrease in the middle of retirement and then tend to rise again due to medical expenses, although not as high as the beginning of retirement.
- Retirement expenses are at their peak when you retire.
- What are the implications for my retirement?
- Many retirement models overestimate the cost of retirement.
- The reason for this is the retirement modeling tool is assuming a set rate of inflation. They are showing this level adjusted for inflation over time.
- This is often unnecessarily conservative.
- Does it make sense to consider if it increases step-in-step with inflation?
- What happens if spending will greatly change throughout retirement?
- The reason for this is the retirement modeling tool is assuming a set rate of inflation. They are showing this level adjusted for inflation over time.
- A retirement modeling tool with a fixed inflationary percentage is going to show you that you must work more / spend less / etc. to reach your goals, when in reality you may be in a position to retire today.
- Many retirement models overestimate the cost of retirement.
- Travel & entertainment
- Understand your goals for travel & entertainment.
- How many trips per year would I like to take?
- Do I want to travel internationally or domestically?
- Understand your goals for travel & entertainment.
- Medical expenses
- There are certain medical expenses you simply cannot plan for.
- What you can do is plan smartly for the options you have.
- What Medicare plan is right for me considering my expenses?
- Do I need long-term care or can I self-insure with my portfolio?
- What you can do is plan smartly for the options you have.
- The more intentional you can be in determining your travel, medical expenses, etc. the more you can understand whether you’re in a position to retire.
- There are certain medical expenses you simply cannot plan for.
- Spending in retirement
- Episode 27: How Much Can I Safely Spend In Retirement?
- Episode 27 discusses how much you can safely spend in retirement to ensure you don’t run out of money.
- What is a sustainable withdrawal rate in retirement?
- How can I ensure I don’t outlive my money?
- It’s important to note that if your expenses are increasing by less than inflation, you may be able to afford to take out more of your portfolio for your retirement goals in the earlier years of retirement.
- On average, by the time you’re 80-85, your living expenses are 75% – 80% of what they were when you initially retired.
- This puts less pressure on your portfolio to have to continue to sustain the same standard of living from age 65 through the end of retirement.
- It likely is possible to spend more in the early years of retirement and not have to build up as large of a portfolio as you may anticipate.
- On average, by the time you’re 80-85, your living expenses are 75% – 80% of what they were when you initially retired.
- Episode 27 discusses how much you can safely spend in retirement to ensure you don’t run out of money.
- Episode 27: How Much Can I Safely Spend In Retirement?
- Summary
- Inflation (cost of goods and services) increases for retirees faster than for individuals who aren’t in retirement.
- Expenditures for retirees tend to decrease over time (higher inflation, lower expenditures).
- On average, the real spending of retirees tends to decrease from the start of retirement until the mid-80s and rises again in the later half of retirement with the cost of medical expenses increasing.
- Many retirement models overestimate the cost of retirement and tell us we must decrease spending / increase income in order to reach our retirement goals.
- The better you can get at determining travel expenses and potential medical expenses, the better you can control spending and the more peace of mind you can have when it comes to understanding your position when it comes to creating a meaningful retirement.
- Inflation (cost of goods and services) increases for retirees faster than for individuals who aren’t in retirement.
Timestamps
0:35 – Listener Question
2:15 – Inflation in Retirement
4:14 – Spending Habits Throughout Retirement
7:07 – Real Cost of Retirement
9:44 – Medical Expenses in Retirement
11:14 – Retirement Models: Are They Accurate?
13:43 – Understanding What You Can and Can’t Plan For
15:33 – Spending Rates in Retirement
17:28 – The Retirement Spending Cycle
19:23 – Aligning Your Investments With Your Financial Goals
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