Will You Spend the Same Amount in Retirement Every Year?

The question at the heart of retirement planning is to determine how much money will be needed in savings when the client stops working. To calculate an estimate of this number, most clients first determine an estimate of what they need to live on each month.  Most people rely on the 4 percent rule, which assumes that you invest in a mix of approximately 60 percent stocks and 40 percent bonds, and that you can safely spend 4 percent of your savings annually over 30 years without running out of money.  

An example of this is a client retiring with $1 million and withdrawing $40,000 annually from their portfolio.  Add to this an estimate of $40,000 in social security, and your annual spending budget in retirement is assumed to be $80,000 per year for thirty years. But do retirees actually spend the same amount each year for the rest of their lives?Data from the Bureau of Labor Statistics suggests a decline in spending over the course of retirement.  The mean spending for households headed by 55 to 64 year olds was $65,000 in 2017, according to the Consumer Expenditure Survey.  Spending dropped to $55,000 between the ages of 65 and 74, and after that, fell to $42,000.  Housing costs remained steady and health care expenses increased, but nearly every other category experienced sharp declines.

It is more important than ever to meet with your financial advisor frequently in the retirement years.  There is a huge shift in psychology when people retire and begin living off of their savings, instead of employment income.  The people who can do this with the least amount of anxiety are usually the ones who have planned for their retirement, and see stability in their portfolio through diversification and adjusting their allocation to meet their new risk tolerance.  They can go through their retirement years with less anxiety, while others are constantly asking "Will we by O.K.?"

We just returned from a trip to Charleston, and walked at least eight miles a day, and really enjoyed our trip. I was thinking that some people who put off traveling until they are much older may not be able to enjoy trips like this.  It is important to be able to save while you are working, but also to be able to spend your money without worry in retirement.  If you would like some guidance on retirement planning, please contact me to schedule a call.