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is it dangerous to forecast declining expenses?
Old 04-18-2015, 07:29 AM   #1
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is it dangerous to forecast declining expenses?

our plan includes some assumptions for some explicit declines in spending compared to today. My spreadsheet has 1) today's expense rate, 2) when we sell big home and move in a few years, 3) when the kids are out of college and indepdendent 4) when we are 70 and SS/Medicare/RMDs kick in (I know medicare kicks in before 70 but just used 70 to simplify.

Do you pro-forma model reduced expenses in the future or is that too risky?

Some of the bigger $ examples
- property taxes, mortgage, upkeep expenses on our big primary home which we will sell once the kids are all away @ college. Assuming smaller home expenses.

- reduced cost of health and auto insurance when kids are off our plans in mid 20's

- reduced groceries and other expenditures when no longer have three teen boys @ home

- medicare vs private health care
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Old 04-18-2015, 07:45 AM   #2
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Have you read this (from the FIRECalc instructions)?

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Ty Bernicke's Reality Retirement Planning: A New Paradigm for an Old Science describes extensive research showing that most people see significant reductions in spending with age (not related to reduced assets or income). If selected, this option will reduce your inflation-adjusted yearly spending by 2-3% per year starting at age 56, and then stabilizing at age 76 to keep up with inflation. You should read his article for details if you plan to use this option.
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Old 04-18-2015, 07:49 AM   #3
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You can but be careful.......kids finish college......but do you pay for weddings? Do they move back home? You sell big home.....but it costs money to move, redecorate, etc.

Chances are you'll save money but have you added inflation, extra medical costs. travel and all those good things you can do in the early years of retirement. Then come grandkids, for us that meant extra presents...big family dinners.

I guess what I'm saying is everyone is different. And, if you want to subtract costs going down also take a look at what increased expenses may add as well.....we built in a cushion....haven't needed some of it.....glad we've had it at other times. good luck!
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Old 04-18-2015, 08:05 AM   #4
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I used Ty Bernicke's Retirement Planning model some years ago and I tend to believe it has some merit, however, I still based my future planning spreadsheet on a consistent spending model and estimated inflation adjusted. Sure some of my cost may go down as I age, but others may go up. (e.g. we've already seen medical cost going up significantly in the past few years) If my spending does go down then that's great, but if not I won't be unpleasantly surprised.
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Old 04-18-2015, 08:06 AM   #5
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I don't assume declining expenses. I am happier budgeting very conservatively and am okay leaving money to the kids and charity than have to worry about running out.
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Old 04-18-2015, 10:17 AM   #6
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I see the model and the research, but I am still skeptical that they controlled for all the relevant factors, such as if you are starting to run low on funds you reduce expenses. Besides, I don't expect to model my expenses on averages, I expect to want to adjust my expenses based on my own choices. And lastly, my own anecdotes for relatives who could afford to all adjusted spending upwards as they aged. They employed more in home assistance for cleaning, handyman and lawn mowing. They moved into expensive senior assisted living places. They stopped travel off the beaten path, and when they did travel went to expensive hotels. Sure, they eventually started staying home at assisted living when they were very old, but there were a lot of years (quite old years) before that happened. I'd rather model level or rising expenses (who knows what great new thing will be invented that I want one) and if there's extra margin of safety my heirs get a bonus. Okay with me. Running out of money so I have to sit home and watch TV instead of going on adventures is not okay.
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Old 04-18-2015, 11:04 AM   #7
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I don't assume declining expenses either, although I don't travel. Those who love travel may find that their spending is greatly influenced by how much they travel, and that in turn may be influenced by a multitude of factors including age. Other factors that may influence spending in retirement include medical expenses, which in my experience get somewhat higher after age 60 even if one is relatively healthy compared with others this age.

For a variety of unpredictable reasons, it turns out that I am better off financially in retirement than I was while working. So, I am spending more each year. Last year, at age 65-66, I spent more than I have ever spent before in my entire life. Unless you are clinically depressed and/or handicapped by sub-par imagination, don't expect to find that you suddenly don't desire anything any more just because you are older and retired.

Also, I am expecting that at some point I may need some level of care and might have to move into a CCRC. These are not cheap! I hope to live independently as long as possible, but if and when I eventually need care, then I have to be prepared to pay a lot for it.
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Old 04-18-2015, 11:27 AM   #8
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Research has shown retirement spending generally follows a "smile" pattern; that is, spendng is higher at retirement commencement due to the retiree being more active, involved in travel, hobbies, etc. Mid-retirement, spending slows as retirees become less active, travel less, etc.. End retirement (or old age) spending then rises to about the same level as retirement commencement spending due to elevated medical costs.

I personally am not at all comfortable factoring in reduced spending at any stage, following Bernicke's model, or any other model incorporating reduced spending. If spending is reduced at any point, I'll use that as a buffer. There are too many unkowns IMO to make assumptions regarding future spending. YMMV.
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Old 04-18-2015, 11:43 AM   #9
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Quote:
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Research has shown retirement spending generally follows a "smile" pattern; that is, spendng is higher at retirement commencement
Agreed! Research has shown this part of your statement to be true.

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Originally Posted by Options View Post
due to the retiree being more active, involved in travel, hobbies, etc.
In my opinion, research has more definitively shown that retirees just don't have as much to spend when they get older. Getting old isn't for sissies, and it sure isn't cheap (unless it has to be) IMO.
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Old 04-18-2015, 11:58 AM   #10
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I think the smile thing makes sense and is consistent with what I have observed in people who are retired. I have a option for reduced spending in our later years in our plan, but I don't really use it.
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Old 04-18-2015, 12:12 PM   #11
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Agreed! Research has shown this part of your statement to be true.



In my opinion, research has more definitively shown that retirees just don't have as much to spend when they get older. Getting old isn't for sissies, and it sure isn't cheap (unless it has to be) IMO.
I think it was Dirk Cotton or Scott Burns (or both?) where I read the links to the research. A number of other places have conducted research into retiree spending as well, but I can't remember I'm too lazy to look for it . I recall it showed retirees just don't spend as much on most things as they get older, but late stage retirement medical care expenses begin to increase. What was reassuring to me was that although medical expenses rose in late retirement, it didn't surpass spending in early retirement, due to the offset of decreased discretionary spending. Again, I personally am not at all comfortable planning on any type of reduced spending, and intend for any actual reduced spending to act as a buffer/cushion.

I couln't agree more that getting old isn't for sissies, which is why I intend to remain in denial.
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Old 04-18-2015, 01:24 PM   #12
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Quote:
Originally Posted by W2R View Post

Quote:
Research has shown retirement spending generally follows a "smile" pattern; that is, spendng is higher at retirement commencement


Agreed! Research has shown this part of your statement to be true.
The other unknown is whether studies that show a "smile" pattern of spending is based on pure choice and they still have the means to spend but simply don't, or 1 of 2 other (likely) factors:

1) The person working has been looking forward to a flurry of activity to do once they retire (travel and/or moving to a retirement location probably being a large %) - then, having done that, they don't have many other items on the bucket list to do that are too expensive, and spending naturally draws down due to an absence of "must do" activities,

or

2) Retiree blows a big wad of money in the first few years, then reality sits in and they say "Ohhhh, crap! Better tighten the reins now that I am living off of this and see how fast it's dropping...."

From anecdotal evidence on the board, it has sounded like a good chunk of active forum posters have a fairly consistent budget in retirement without too much dropping down. I just don't see many people choosing not to spend despite a rising portfolio! I mean, if you choose to retire with a 2.75% or 3% WR, and your portfolio does ok, and you soon find yourself needing just a 2% WR, most on this forum would likely find SOMETHING to spend that extra money on, rather than simply let the portfolio grow and grow. Even if it's just to donate to charities, I don't think many people (save a few that have a compulsion to save) would willingly simply spend less and less % of their portfolio and let it accumulate for no reason.

The real telling study would overlay that "smile" spending pattern with both both the portfolio balance and the annual cash flow to see if it's influenced by the other, or if it's truly independent.
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Old 04-18-2015, 01:42 PM   #13
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The other unknown is whether studies that show a "smile" pattern of spending is based on pure choice and they still have the means to spend but simply don't, or 1 of 2 other (likely) factors:

1) The person working has been looking forward to a flurry of activity to do once they retire (travel and/or moving to a retirement location probably being a large %) - then, having done that, they don't have many other items on the bucket list to do that are too expensive, and spending naturally draws down due to an absence of "must do" activities,

or

2) Retiree blows a big wad of money in the first few years, then reality sits in and they say "Ohhhh, crap! Better tighten the reins now that I am living off of this and see how fast it's dropping...."

From anecdotal evidence on the board, it has sounded like a good chunk of active forum posters have a fairly consistent budget in retirement without too much dropping down. I just don't see many people choosing not to spend despite a rising portfolio! I mean, if you choose to retire with a 2.75% or 3% WR, and your portfolio does ok, and you soon find yourself needing just a 2% WR, most on this forum would likely find SOMETHING to spend that extra money on, rather than simply let the portfolio grow and grow. Even if it's just to donate to charities, I don't think many people (save a few that have a compulsion to save) would willingly simply spend less and less % of their portfolio and let it accumulate for no reason.

The real telling study would overlay that "smile" spending pattern with both both the portfolio balance and the annual cash flow to see if it's influenced by the other, or if it's truly independent.
Factor 1 was what came out of the studies. Older retirees spend less on everything from clothes to travel to personal items. Interestingly, housing costs increase modestly, but I don't recall why. Only spending patterns were considered, without regard to charitable donations, bequests, or PF ending balance motives. I read about retiree spending patterns in some detail again only just recently but for the life of me cannot recall the source. I'll see if I can dig it up. The source was independent, however, as I purposely disregard all others.
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Old 04-18-2015, 02:34 PM   #14
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Some of the bigger $ examples
- property taxes, mortgage, upkeep expenses on our big primary home which we will sell once the kids are all away @ college. Assuming smaller home expenses.

- reduced cost of health and auto insurance when kids are off our plans in mid 20's

- reduced groceries and other expenditures when no longer have three teen boys @ home

- medicare vs private health care
Nothing wrong with adjusting expenses towards a new expected life situation. Especially with kids.

What may be a good exercise though is make a list of items that can increase your expenses too.

Especially those that you don't spend anything on right now. Like others have mentioned: weddings, travel to said kids, college costs, helping out a struggling family member (boys, unemployed, moving back in?), new hobbies as time becomes available. Divorce ...
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Old 04-18-2015, 03:03 PM   #15
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Here's the thing. Yes you can "risk" forecasting lower expense spending at some point in retirement, just as you can use the Bernicke option in FIRECALC, use less than 100% success models in FIRECALC, ignore Pfau's (and others) warnings that forecasting based on historical results ignores todays valuations, etc. It's been said you can keep beating any calculator, spreadsheet or collection of numbers until you get what you want out of them (AKA optimism bias).

The question is how close do you want to cut it? How much of a cushion do you want to leave yourself in the likely case that what actually happens will not match what you planned for? Do you have a plan B, C, and D in the event of the equivalent of a financial meteor strike? There are no guarantees, and seeking a perfect plan, or a way to eliminate uncertainty is just not going to happen. But why push it?

As I said above, I have no confidence regardless of any spending study in my own ability to forecast my spending 30 or more years from now. What I am doing, what a lot of people do, is have a set spending amount with a large amount of flexibility built in. I can reduce discretionary spending by as much as 25% for as long as it takes for markets to recover. My success rates in all calculators is well above and beyond 100%. I have buffers elsewhere as well.

Just like before retirement, our financial situation is impacted by a series of life events. Remaining flexible and adaptible throughout retirement is just as valuable a skill as in pre-retirement. Practicing frugality before retirement is one of the best ways to achieve this, IMO.
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Old 04-18-2015, 06:58 PM   #16
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A friend ended up raising grandkids. Other friends help out a divorced and disabled adult child and special needs grandchild. Another friend helps support an elderly parent. A lot can happen if you are looking at 40 years of retirement. I would like to be able to provide help like that if needed without worrying about money. It depends what your goals are but ours are not to spend the last dime, but rather have a pleasant retirement with a financial security blanket for the rest of our lives.

I like being frugal. I don't view it as a hardship to be endured but instead a fun hobby. I am sure it would be less fun without the savings making frugality optional, but with the savings I just feel like a dollar saved is an extra dollar for the kids eventually or if they don't need it, it can go to the local elephant sanctuary or the homeless.

I plan for 100% success rate, using a very conservative AA, and end with a higher net worth in the Fido RIP than we have now (in today's dollars) at age 102.
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is it dangerous to forecast declining expenses?
Old 04-18-2015, 10:09 PM   #17
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is it dangerous to forecast declining expenses?

Nah; what could possibly go wrong?

Ha
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Old 04-19-2015, 12:18 AM   #18
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I think it depends on whether you can point to something specific or not. When DH retired and I semi-retired almost 5 years ago we had in high school, soon to start college.

I think it would irrational of us to assume that we would be paying college costs in perpetuity. So, of course, our budget assumes that those costs will go away. Currently, one is out of school totally on his own, and we can see the light at the end of the tunnel on the other two. So, yes, I do forecast our expenses declining as the last two complete school and go out on their own.

There are some other very specific expenses that I forecast going down at various times over the next 5 years. Other than those (which by and large are not huge ones), I don't forecast declines. I think there are likely to be declines in some other categories (just from watching how my 91 year old mother has changed her spending over the years), but I am mindful that there can be unanticipated expenses as well.
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Old 04-19-2015, 03:42 AM   #19
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the big wild card un-doing ty bernicke and sun lifes finding is healthcare costs.

all that nice money that is supposed to be saved when the smile droops to cover the inflation in the things we still buy and do is evaporating .

fidelity's RIP planner figures 7% as a inflation factor on healthcare costs.

this will be our first year retiring and me on cobra , marilyn on medicare and medigap with out long term care insurance is 17K a year .







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Old 04-19-2015, 07:49 AM   #20
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I think two things are getting conflated in this thread. Surely anyone that has a meaningful, actionable budget for retirement spending has medical in it own category - yes? It seems silly to forecast medical spending going down and most folks budget it as going up faster than general inflation (see all the charts above).


OTOH, there are many expenses that are flat going away in retirement - a simple and even silly example is you don't budget for FICA, SS, Medicare taxes in retirement do you - just for the sake of not reducing the budget?


I haven't looked at my budget categories to come up with a super-group called "discretionary" or some such. But I have been able to watch the finances of two senior couples very closely (my parents, DW's parents) and I see a clear pattern of discretionary spending going down. Less on food, less on goods, less/no travel, less on autos (sold one or two and many fewer miles), etc.


To the OP, I think it would be perfectly safe to budget a diminishment in "discretionary" spending (in current dollars - like medical, your inflation assumptions are in a sense its own category). Whether that forecasted diminishment is actionable is another question.
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