How will your expenses change over time in retirement? Will you spend more, about the same or less in retirement than during your working years?
This is an important question. Retirement planning starts with determining how much you will spend in retirement. And that determines when you’ll retire, how much you’ll need to accumulate to achieve your desired lifestyle, and when you’ll take Social Security, and so on.
Basically, you’re told to plan to spend 70% to 80% of your pre-retirement income per year in retirement. It may be a good start, but experts generally consider it rubbish.
If you want to get it right, you’ll need to use a spreadsheet or some other tool to estimate what you’ll be spending on what, when, and for how long. You’ll also need to consider not just inflation, but also how your spending changes during your retirement – in the start-up, downturn, and non-startup years.
Moreover, fin TheStreet’s Retirement Daily:
Fortunately, there is research that can help you examine how expenses change during retirement. And most published research on the subject suggests that your expenses will decline as you retire.
Retirement expert David Blanchett, when he was at Morningstar, (MORNING) – Get the Morningstar, Inc. published Estimating the True Cost of Retirement, a study that found that real retiree spending declines slowly in the early years, faster in the middle years, and then less slowly in later years, in a trajectory that looks like less of a slow, steady decline and more of a “retirement spending smile” instead. Read Estimating Changes in Retirement Spending and Retirement Spending Smile.
More recently, a study published by Boston College’s Center for Retirement Research, Do Retirees Want Constant, Changing, or Decreasing Consumption?, confirms that expenses do indeed decline in retirement, but that constraints, such as assets and health , opposed to the true importance of preferences. For example, the study found the following:
- On average, household consumption decreases by 1.5% to 1.6% every two years (or about 0.7% to 0.8% per year) during retirement.
- However, the consumption of well-to-do and healthy households is practically stable, decreasing by only 0.3% per year during their retirement.
- Thus, at least in part, wealth and health constraints help explain the observed pattern of declining consumption.
And the policy implications, according to the researchers, are:
- Retirees probably prefer to enjoy consistent consumption in retirement.
- The results suggest that there is a deficit of retirement savings since the declines in consumption are greater for households without assets.
- Social security is an important resource to maintain their preferred consumption.
Certainly, many questions remain, the researchers said. For example, do expenditures continue to stabilize for the household in the top quintile or decile; do survival expectations matter? and do other factors such as risk aversion or bequest motives determine consumption pathways.
So what are other experts saying in response to the Center for Retirement Research report?
Sharon Carson, executive director of the retirement strategist team at JP Morgan Asset Management, agrees that the lack of savings for many is problematic and can lead to an unwanted drop in spending. (Carson estimated the median wealth level in the study to be $271,248.)
Carson doesn’t believe all households want consistent spending, however, especially at higher levels of wealth. She noted, for example, that the top third of participants examined by the authors of the Center for Retirement Research report may not be representative of those with significant assets. And given that, she agreed that further study of different levels of wealth would be helpful.
How does the research from Boston College’s Center for Retirement Research compare to that done by Carson and his team, especially at higher levels of wealth?
Using Anonymous and Anonymized JPMorgan Chase Bank (JPM) – Get the JPMorgan Chase & Co. report. data at one point, Carson’s team sees evidence of increased spending peaking around quarantine for Chase households.
“If we look at households with at least some retirement income – including households with a mix of work and retirement income – the midlife spending spike isn’t as dramatic as it is for the total population, including those with labor income, but we see them as peak spending years – in the 40s and 50s,” she said. “This is true for households whose non-real estate wealth is estimated between $250,000 and $750,000.”
For example, average household spending for those with a bachelor’s degree or higher starts at $88,890 for ages 45 to 54 and decreases to $81,010 for ages 55 to 64, then to $69,990 for ages 65 to 74. years, then $55,970 for ages 75 to 75. more, according to JP Morgan Asset Management Research.
Carson also noted that JPMorgan is in a unique position: it has a large database with households that includes a significant number of households with over $1 million in estimated non-housing wealth. And what they see with these households is this: “A larger spike in spending in middle age for households with $1 million or more in non-housing wealth than for households with less than $1 million. “
So what’s the end result of trying to figure out what your expenses will look like in retirement?
Well, if you’ve saved enough for retirement, your expenses will likely decline slightly — by choice — during retirement. But if you haven’t saved enough and/or if you are in poor health, your expenses will decrease less modestly. And if you want to avoid that, now would be a good time to save more and maybe delay your retirement.
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