The theme this week on the One Minute Retirement Tip podcast is: new research that will shatter your expectations about spending in retirement.
This week I’ve been talking about how retirees tend to spend less in retirement, challenging the conventional thinking that spending is flat.
Today, I’m talking about a few reasons why retirees tend to decrease their real spending over time. By real spending, I mean after adjusting for inflation. It’s important to realize that inflation is going to cause your spending to increase in retirement. If you spend $3 on a gallon of milk today, you might be spending $5 on that same gallon of milk in 25 years. Inflation will make everything more expensive and will increase your spending over time.
But if we remove the inflation component from this analysis, what are the true spending habits of retirees? And the data shows that many retiree spending drops by about 2% per year in retirement.
So if you’re spending $60,000 in today’s dollars in year 1 of retirement, by the time you’re age 90, that might drop to only around $36,000 in today’s dollars.
But why? Why do retirees reduce their spending, even in fixed categories like food and housing? The data shows that retirees have a strong aversion to spending down any assets, preferring instead to live on fixed, guaranteed income sources like social security, pension, and annuity income. In fact, after an adjustment period in the early years of retirement where spending is higher, but the time you reach 70, you’re more likely to adjust your spending to match your guaranteed income.
A big driver of this spending pattern could be driven by a fear of the unknown expenses down the road. What if I’ll need expensive nursing home care, or what if we spend too much and I leave my spouse with very little after I die? Many retirees are also fearful of cuts to social security or pension income, higher inflation, and poor portfolio returns, all of which could change their retirement lifestyle in unexpected and harmful ways.
Most retirees have been around the block enough to know that life happens and sometimes that means massive and unexpected expenses. Retirees know they can be devastated and their portfolio could be wiped out in the worst of scenarios, so rather than taking their chances and spending assets, they often choose instead to preserve what they have and adjust their spending to their guaranteed income sources.
That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip.
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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance