Spending in retirement

18.05.20 10:53 PM Comment(s)

From the Clipboard - Retirement - Does spending go down in retiremement?

No more commuting. No more buying lunches out. No more dry cleaning (though when was the last time you took something to get dry cleaned?). And no more retirement plan contributions.


The assumption is that when we retire, our expenses will go down. And these types of expenses would certainly go down since we wouldn't need to incur them anymore.


But do expenses go down overall?


It’s an important question because there are several rules of thumb when trying to figure out how much we will really need to save (or have saved) to retire. After all, the more we “need” to spend in retirement, the greater the retirement savings needed.


(Now, I’m not talking about those people who claim they live on some ridiculously low amount per year. Yes, it can be done. But it takes a mindset to be extremely frugal. If you aren’t doing that now, you won’t be doing it later…unless you are forced to because you ran out of money.)


The most common rule of thumb is that you need to replace roughly 70%-80% of your pre-tax, pre-retirement income (or roughly 100% of your after tax take home). Reality is that how much you really need can vary significantly depending on things like your health, how much you have saved, and even how much of your retirement income is guaranteed (such as Social Security, a pension, or an annuity).


One suggestion is that instead of spending decreasing gradually over time, a more accurate picture is that of a “smile”. That spending starts out higher, decreases over time before rising again, primarily due to increasing health care costs.




Using data from the 2018 Consumer Expenditure Survey, I took the 4 largest categories of spending - housing, food, transportation, and health care - and looked at their percentage of income by age category.


While income and expenses in dollar terms do go down over time, as a percentage of income, you can see that smile.


What does this all mean?


It means that you may need more money in the beginning of retirement than you expected. This makes sense after all - while we’re still young… while we have our health.., etc. You hear people say these things when considering travel or visiting far away family and friends. In fact, there’s some anecdotal evidence that spending in the initial years of retirement is even higher than in pre-retirement before dropping off at older ages.


Spending also is highly dependent upon what you want to do in retirement. Travelling the world is very different than sleeping and watching TV (the 2 most common activities retirement, according to the American Time Use Survey, 2018 Bureau of Labor Statistics).


Bottom line - how much you need to save for retirement depends on how much you want to spend in retirement. And how much you want to spend in retirement depends on what you want to do in retirement.


So, what do you want to do?