I finally read one article too many about how people’s expenses decline as they age. This is used to justify saving less for retirement and spending more money early in retirement. Here I analyze this line of thinking with the technical concept of retirement crappiness.
It’s fair to say that some people have enough money to have good retirements, but others are more strapped for cash and have crappy retirements. The typical retirement is only somewhat crappy.
Let’s consider what will happen to the typical retiree destined for a somewhat crappy retirement. Some of these people will see the moderate crappiness coming and will control their spending to a not-too-painful level. However, most typical retirees won’t see the crappiness coming or won’t admit it to themselves and will initially spend enough for a good retirement. At some point they’ll be forced to cut spending and start experiencing some crappiness. A common experience as funds dwindle is continued spending cuts and an increasingly crappy retirement experience.
This explains the results of studies that find people spend less as they age. As savings decline, spending declines and crappy retirement experiences increase. Some would have you believe that people voluntarily seek crappiness as they age, but the dominant reason for decreased spending over time is having no choice.
So, when someone tries to tell you that you don’t need to save so much for retirement and can live it up in your early 60s because of some study or other, what they’re really saying is that lots of people have crappy retirements and you should plan to have a crappy retirement too.
Morning MJ;
ReplyDeleteLets just cut the crap and get to the heart of the bowl.
Live within your means. If you have done that through most of your life then you should not have a problem once you retire.
I agree with you that one reason people may spend less when they retire is, quite simplily, because they have less to spend. Seems rather odd though that they should become so enightened only after they retire.
RICARDO
@Ricardo: I agree that people should live within their means, but we can forgive them if they're not certain of exactly how much spending is safely within their means when they retire. There are too many experts running around telling people its OK to spend a lot early in retirement because they'll "naturally" want to spend less as they get older.
DeleteInteresting. What is your confidence of this conclusion? It does sort of make sense that people would gradually reduce spending as they tire of travel or consumption, but your conclusion seems plausible as well. In the last couple years I've been more cognizant that correlation does not equal causation. I suppose ultimately there could be a confluence of reasons why spending declines in retirement.
ReplyDelete@Gene: I agree that there are many reasons that spending declines as people age. The studies I've looked at point to running out of money and inflation eating into fixed payments as the dominant reasons. When people think of spending less as we age they tend to focus on 85 or 90-year olds. But the decline in spending starts even in the mid to late 60s. However, those with lots of money don't tend to spend less.
DeletePersonally, I'm hoping to have more money available as I age to deal with physical problems. I may need to pay for a younger family to travel with me to get the help I need. There are many more ways my old self could make good use of money.
Ah, thanks for the follow up. Considering people with more wealth don't see the same kind of drop as lower-wealth retirees, that seems to indicate the poorer folks feel constrained by their decreasing wealth.
DeleteI'd be interested to know if those whose spending decreased generally wish they'd worked longer. I'd suspect a lot of our spending doesn't improve happiness, with the exception of those who are having trouble meeting basic needs.
@Gene: Being forced to give up a little more each year probably decreases happiness. I think it makes more sense to start retirement spending a safe amount to try to avoid having to tighten the belt a little each year. I've watched some of my parents' generation do this and it doesn't look fun.
DeleteI read the Wisebread article and so are you saying that the reason people eat less, drive less, and generally spend less is not because they're old and retired but because they just don't have the money?
ReplyDeleteThis was an interesting read on the topic by Alexandra Macqueen - http://www.theglobeandmail.com/globe-investor/personal-finance/retirement-rrsps/does-spending-decline-as-we-age-heres-what-the-numbers-show/article24981359/
@Robb: People spend less for a variety of reasons, but yes, I'm saying that the dominant reasons are that their savings are dwindling too fast and their fixed incomes are eroded by inflation.
DeleteI wrote about the Blanchett study a while back:
http://www.michaeljamesonmoney.com/2014/02/telling-us-what-we-want-to-hear-about.html
Funny (maybe depressing to some)!
ReplyDeleteSort of agree with your conclusions but believe it really depends on the nature/size of your spending (which shifts with age). For example, if you have a large travel budget in early retirement, this can shift to become your health care budget for late retirement.
Hard to say whether you will or will not spend less. At the very least, doing some projections and reviewing your annual spending will keep you on top of your money in retirement.
@Patricia: As long as you start out with a reasonable spending rate relative to your savings, the strategy you describe will likely work well. But I've seen too many otherwise very good advisors recommend 5% or higher spending rates for 60-year olds. This is a formula for nearly certainly needing to cut spending each year. Retirees who are forced to cut spending won't have an opportunity to divert travel spending to health care spending.
DeleteThis makes sense...if I want to have a crappy retirement maybe I don't need to save at all? :)
ReplyDeleteNever seen an article with the word "crappiness" in it so often - I like it.
Cheers man,
Mark
@Mark: I seriously considered using "shittiness" but I decided to back off a little :-)
DeleteHoly crap !
ReplyDeleteBeing an older sugar daddy is not cheap anymore. It's really tough to stay within the limits of that 4% rule. I'm dipping into the extra money I save driving my Prius as a hedge though.
I was actually surprised to hear a comment on the radio the other day. Someone said if you have been a minimum wage earner your entire life, apparently you will receive more money per month when you retire when all your benefits kick in, then when you were working. So maybe the "study" refers to those people...?
@Paul: The good news is that the older you get, the higher the percentage of your existing portfolio you can safely spend. The 4% rule refers to the starting percentage when you expect a 30-year retirement.
DeleteI'm guessing these studies seek to include all people. However, most such studies focus on Americans.
On the other hand, some people are so worried about running out of money when they retire, they are saving too much. I've read The Real Retirement by Fred Vitesse and a report by Malcolm Hamilton on the subject. Both agree that you need to replace about 50% of your working income to have the same standard of living in retirement. Depending on your working income, this means saving about 3-7% of your income for 35 years, having your mortgage paid off, and no longer supporting your adult children. Saving more than this means you will have more disposable income in retirement than you did while working/raising the kids.
ReplyDeleteMichael, do you agree with their analysis?
Larry
@Larry: It's true that there are some who save too much, but it's mostly the retirement industry that constantly promotes huge savings rather than actual people who save too much. My own family only needs about one-quarter of our current family income in retirement. I don't think it makes much sense to base it on income; why not focus on spending? I figure out what I spend now, adjust for changes in retirement, and that gives me a good target.
DeleteThe idea of saving steadily for 35 years is very optimistic. People lose jobs, change careers, become ill, get tired of working, and have a host of other reasons why saving might get interrupted. Your saving rate should be high when things are going well. If you're lucky enough to pull down a steady income for decades with no problems, you can reassess your portfolio size and choose to start saving less.
I'm wary of Fred Vetesse's advice; he promotes a 5% withdrawal rate in retirement, which is unrealistic for a healthy 60 to 65-year old retiree, particularly if you're paying portfolio fees above 1%.