It’s usually worthwhile to question conventional wisdom. At the minimum you usually learn where that wisdom came from. Often you learn the conventional wisdom is not the best approach. This happens to apply rather well to the topic of retirement spending. Lets take a look at the conventional wisdom regarding retirement spending and see why it may not be the best approach.

All the standard retirement models tell retirees to adjust spending every year for inflation right? This how the SWR (Safe Withdrawal Rate) model works. You pick a percentage of the portfolio to withdraw in year 1 and then adjust that spending every year for inflation. Simple enough. The theory being that at the minimum we want to maintain the same ‘standard of living’, i.e. real spending, from year to year. The biggest question to ask is this model actually how retiree spending evolves over time?

Anectodally, this model has always felt a bit off to me. For one, I meet a lot of retirees and speak to them quite a bit about finances and spending. Many I’ve met have held spending constant for years while maintaining their quality of life. In my personal situation, on average spending has either stayed the same or declined every year. What gives?

Fortunately, some recent research has shed some light on this topic. Michael Kitces has a great post covering this research which I highly recommend. I’ll just highlight a few points from the post. Lets first look at how retirees actually spend. Here is the data:

Annual Real Change in Consumption for Retirees May 20 2014

The orange line in the graph above is spending adjusted for inflation, real spending. This is the line all retirees fall on according to the recommended retirement models. The reality is somewhat different. For the majority of retirees real, inflation adjusted spending declines in retirement. Even towards the end of life. The declines are on the order of 1% a year, growing to 2% a year, then back to 1% a year in the later years but still never positive. Definitely a different reality than the models portray. An important point: this is real spending. Actual spending may still actually increase. For example, inflation is 3%, spending goes up 2%, real spending is then down 1%. Now lets look at how you can use this in your retirement.

I think the best way to use this research is to take a look at your retirement in stages. Michael also talks about this in his post but basically the idea is to divide retirement into three spending stages. Like pictured here;

three stage retirement model may 2014


Each of the three stages can be modeled with a different change in retirement spending. For first stage, say 60 to 70, -1% per year in real spending could be used (or conservatively the standard model’s o% per year), for the second stage, 70 to 85, -2% per year, and for the third stage back to -1% per year. This can be tailored to be fit your specific circumstances which is also much better than the standard retirement model.

OK, so far all we’ve done is match the retirement model to a better representation of retirees’ actual experiences. Now for the punchline. Being that realistic scenario is less spending than the model means one of several things. One, the standard SWRs are too conservative. Two, retirees need less money to retire to being with. Three, worst case, the SWRs from the standard retirement model plus a more realistic spending outlook means a much higher probability of success in retirement. I’ll take a look at some of these implications in later posts.

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6 thoughts on “ Spending Realities in Retirement

  1. Paul, thanks for the post. You are describing a scenario that I suspected but it is much better to have documented proof than assumption. Any slight edge to enable us to retire sooner is always appreciated.

  2. Paul, the early retirement crowd such as Jacob from Early Retirement Extreme and Pete from Mr. Money Mustache preach about getting your spending as low as possible (e.g., <$25k/yr per family). I am curious if you and Nina already thought you had your spending as low as you were comfortable with and it surprisingly still went lower, or if you knew there was wiggle room to easily reduce spending.

    1. Jeff, when we started we agreed on a budget that would allow us a very comfortable lifestyle. It was definitely not a budget to get our spending as low as possible. So, yes there was wiggle room and we knew that. Given that we have still been surprised that our spending is lower than planned and more importantly not increasing. While we watch our spending and are just frugal by nature, there has been no real effort on our part to reduce spending. Also, we know that if we had to we could drop our spending significantly. For us, this flexibility is key.


  3. I was surprised to find that if I retired, I could immediately save ~$15k/year due to reduced Health Insurance through ACA subsidy, eliminating the second vehicle, and moving to a lower property tax area, plus some other extra expenses no longer needed. Makes quite a difference at a 3% “SWR” – as that’s an extra 500k you don’t need for retirement!

    1. Fantastic. And you’re 100% correct, it can make a huge difference. People really underestimate what NOT working can save you.


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