Today I wanted to revisit the topic of spending in retirement. Having a retirement spending plan and monitoring that plan is just as important to retirement success as asset allocation or deciding on safe withdrawal rates (SWRs). Yet, it’s not discussed nearly as much as the other retirement topics. And most retirees don’t do it. I’ve talked about retirement spending in the past on the blog , from a personal anecdotal perspective, and from the overall perspective for all retirees, both questioning the conventional wisdom.

The conventional wisdom models retiree spending as being adjusted for inflation, as measured by CPI (Consumer Price Index), each year. The theory being that retirees need to adjust spending up each year by the CPI in order to keep their standard of living the same. The problem with the model is that it doesn’t fit the data. The data shows that retirees adjust spending at a rate less than inflation, about 1-2% per year less than inflation. This is what my anecdotal experience has shown as well.

Now, lets take a look at a recent paper with even more data on retiree spending but with a different look. Hat tip to the Kitces blog . The paper looks at actual retiree spending and the evolution of those retirement portfolios under different market conditions. First I’ll just state the key finding; most retirees don’t spend nearly as much as they could. Not even close. Below is a summary table from the study.

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Now let me highlight what I think are some noteworthy results of the study.

  • “…we found that most retirees could increase their consumption simply by spending all of their available income with no spending from financial assets.”
  • In the top 3 quintiles of retirement wealth, basically anything over about $28K in retirement assets, retiree income more than covered retirement spending without touching retirement assets
  • “Results show that retirees with median wealth have a consumption gap of approximately 8 percent on average, and that retirees with higher levels of wealth have a consumption gap as high as 53 percent. Even after setting aside 40 percent of beginning financial assets to cover spending risks and bequests, a consumption gap as high as 47 percent still exists for the wealthiest retirees.”
  • These results held across all asset allocations, even at 0% equites, or even 100% annuities
  • These results also held when accounting for uncertain medical expenses, longevity and bequests to family members
  • If actual life expectancies had been used, instead of full 30 year periods for all retirees, the retirement consumption gaps would be even larger

Seriously. Wow! These are some pretty remarkable results. And not what one would expect from listening to the financial media. Why would this be the case? Why is there such a large gap between what retirees spend and what they could spend? The authors have some opinions.

  • “Fear, failure to plan, and a lack of confidence in pre-determined drawdown strategies may be significant contributors to the conservative consumption observed among retirees”
  • “Feelings of inadequate preparation may shift retirees’ mindsets from decumulation to preservation.”

Basically, behavioral factors can explain most these results. The same factors that impact the investing and asset allocation side of retirement. That is certainly what I have observed. We are our own worst enemy. In that respect the results are not all that surprising. And just like investing, the way to improve the situation is to plan, monitor the plan, and adjust accordingly. That could lead to higher confidence in retirement and a more enjoyable retirement overall.




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7 thoughts on “ Retirement spending revisited – live a little why don’t you…

  1. Wow Paul, how interesting. There’s actually an here argument for annuitizing more of one’s assets, so you can consume them with more confidence, and enjoy them more… While you are still alive

  2. Are these people “under spending”, or did they “over save”, or both? I know several retirees with large assets compared to their spending habits – all of them are frugal by nature and that did not change when they retired.

    They could cut loose and spend more, but it would feel weird and unnatural. I happen to be one of them.

    1. Maybe both. I’m one of those too. The big issue I see is that the models and advice are just wrong give the actual data.
      The ‘we’re not saving enough’, ‘2% is the new safe withdrawal rate’, ‘the retirement crisis in America’, just doesn’t fit retirees’ real world experiences.


  3. This make some sense , because the same people who spent the time to save and invest are going to have a hard time ,just because they are now retired to spend at will. It looks like the people in the low income / asset classes spend a much higher percent . I think some of this is just some people love to save and invest and others do not fear spending money . /John

    1. True. And some pay way too much attention to all the retirement gloom and doom talk and limit their lifestyles and experiences because of it. Or they stay at work way longer than they need to. I know many of both those kinds people.


      1. If fear stops you from enjoying what you have, that is a problem. And it is true that almost nobody is shouting: it’s fine to spend more under X conditions. I… I think that is a good message.

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