I arrive with good news for current and aspiring American retirees: you’re far more likely to smirk your way through retirement than spend it with a smile--metaphorically speaking.
How is that good news, you ask? I’ll get to that. But first, some background.
The Real Retirement Crisis
Readers who’ve been following my content--books, articles, and videos--know I have a contrary opinion on the so-called “retirement crisis.” My view, born out of three decades of working with middle-class Americans, is that we are far more likely to die with more money than we had on the day we retired than we are to spend our last dollar.
The primary challenge is not making sure your money lasts as long as you do. We can usually figure that out with the basic tools of our trade. The harder challenge is getting you to spend money on things that are meaningful to you. You must make the transition from saving and investing to spending and enjoying.
It’s so easy to say. So hard to do.
Either You Take the Vacations, or Someone Else Will
As you’ve heard me say before, all your money will be spent--by you, your heirs, a charity, or the government. Merge this insight with the reality that, at best, you can hope for three stages of retirement: the Go-Go years, the Slow-Go years, and the No-Go years.
I’ve explained these elsewhere. They should be intuitive to anyone with an extended family. For many of my clients, the real crisis is underspending in the Go-Go years. That’s right: it’s spending too little.
The Smile Becomes a Smirk
Retirement researcher David Blanchett once described spending in retirement as a smile: higher in the early years, declining in the middle years, and curling upward late in life as health costs rise. His new study revisits that idea and finds evidence of both a smile and a smirk.
For the typical retiree--the median person--inflation-adjusted spending generally continues to decline. That creates the smirk. When researchers average the experience of all retirees, however, spending can turn upward at advanced ages, likely because a small number of people experience large health-care shocks. That creates the smile.
The 2024 Consumer Expenditure Survey provides a useful snapshot. Households headed by a person age 75 or older spent an average of $55,834, compared with $65,354 for households headed by someone age 65 to 74--about 85 percent as much.
This reality has traditionally been explained by researchers as one of need. Older people spend less, it’s reasoned, because they had less to spend.
Why Well-Funded Retirees Still Pull Back
Blanchett’s new research mines data that follow people over time. So he’s reporting on the real experience of acgtual households. It also estimates each household’s funded status and sorts the households into five groups, ranging from very underfunded to very overfunded.
The striking finding is that even people who appear able to spend more often do not. As Blanchett writes, “The fact that even overfunded households reduce real spending suggests that choice plays an important role.”
Many of you reading this are likely well-funded for retirement. The research suggests that you may choose to spend less as you age. I suggest that if this conforms to your reality, you choose to spend a little more while you are healthy enough to enjoy it.
The Wild Card: Health and Long-Term Care
The smirk does not describe everyone. Over 10-year periods, Blanchett found that roughly 75 percent of households around age 60 and 85 percent around age 80 experienced a decline in real consumption. The flip side is that a minority did not.
Health care helps explain some of the difference. A relatively small number of costly health events can pull the average upward even while the median retiree continues to spend less. Long-term care is an especially important risk. Medicare generally does not pay for long-term custodial care, although it may cover limited skilled care when its conditions are met.
But that is not a reason to avoid spending early. It is a reason to make a plan for the care--whether you insure part of the risk, earmark assets to self-fund it, or knowingly accept the risk. The answer can differ. The need for an answer does not.
What This Means for Your Plan
First, you can embark on retirement more confidently if your plan shows that your nest egg can cover your initial spending with room to spare.
For years, we’ve been told by data crunching experts that that we must limit our withdrawals to 4 percent of accumulated assets. This research indicates that people can spend more, with initial withdrawal rates at 6 percent.
Stay tuned, this is sure to be hotly disputed and there will be plenty of additional studies to follow.
This is certainly neither a personalized recommendation nor a blanket permission for everyone to withdraw more than 6 percent.
The practical lesson is to build a flexible plan. Separate essential spending from discretionary spending. Make room for more travel, family time, and experiences in the early years, while keeping a deliberate reserve for health and long-term-care risks.
Then do the second thing: spend earlier--and sleep well doing it.
As Blanchett notes, the spending pattern may put a smirk on a graph. But done well, it can put a smile on your face. It certainly puts one on mine.