Linda Stern: "What all those retirement studies get wrong"

[MichaelB]

This page has a wealth of data and is very recent The 2011 Statistical Abstract: Income, Expenditures, Poverty, & Wealth

 

[youbet]

Regarding the last 4 posts, The Bernicke model makes no judgement whatsoever as to why spending tends to falls with age. The model just notes the trend. The trend may be best measured by the decade though rather than just over a few years.

One of the major issues with Bernicke's data (if you can call it that) is that it only notes a trend but gives little other statistical description of what's happening. In an extreme example, if 90% of retirees continued to spend at original plan + inflation and 10% reduced, the "trend" is that retirees are spending less. Intuitively, I believe many retirees do spend less as they age due to decreasing energy, health issues, planning becoming a hassle, etc. But to include the assumption as part of budget planning for RE would have been a stretch for me.

For those that keep up your (inflation incremented) spending to maximize your retirement enjoyment, You have my blessings. I too intend to spend the nestegg and don't plan on leaving much.

Oh, thank you! Having your blessing means so much to us!

BTW, we're not spending in order to insure we don't "leave much," as you put it. We're simply enjoying doing some things we never had time to do as much of as we wanted while we were working. And because we like outdoorsy activities, we're finding they're becoming more expensive as the years go by and DIY is not always possible anymore.

Example: a wilderness canoe trip costs 3X as much with a guide (to do the heavy lifting at portages, etc.) as it did to make the trips on our own.

Example: DW and I have considered DIY home upkeep an important money saver over the years. We've always taken care of landscaping, decorating, minor remodeling, most repairs, etc., ourselves. No lawn service, no cleaning lady, no painters, few tradesmen, etc. That's starting to change due to both time and diminished physical abilities. And it costs money we didn't have in the budget before.

I'm sure that if we needed to deploy a Bernicke type withdrawal plan going forward, we'd be able to. We fully understand what it means to hunker down and keep the purse strings pulled tight. But, for now, we reject the Bernicke system and plan to keep on keepin' on.

 

[rescueme]

Example: DW and I have considered DIY home upkeep an important money saver over the years. We've always taken care of landscaping, decorating, minor remodeling, most repairs, etc., ourselves. No lawn service, no cleaning lady, no painters, few tradesmen, etc. That's starting to change due to both time and diminished physical abilities. And it costs money we didn't have in the budget before.

I feel the same way. Before I retired, we had more time (and energy) to do these things, than money. Now in retirement, we have more money than time (OK, we have the time, but not the energy nor desire) and we have no problem with keeping up our living standards by paying others to do things that we can no longer (or want) to do.

The concept of spending less (assuming you wish the same lifestyle) as you age seems a bit of "bunk" to me.

DW/me have planned for 100% of pre-retirement expenses, regardless if it means travel or having a live-in person to attend to our daily needs as we age...

Just my (our) simple POV...

 

[Lsbcal]

Just want to say that there is no "correct" spending model for everyone IMO.

If you want to spend more and have the capability to do so, then great. The economy and working people could use the boost too so you are doing good there.

If you don't have the means or are worried about future personal economics and choose the frugal path, that is fine too.

 

[youbet]

Just want to say that there is no "correct" spending model for everyone IMO.

If you want to spend more and have the capability to do so, then great. The economy and working people could use the boost too so you are doing good there.

If you don't have the means or are worried about future personal economics and choose the frugal path, that is fine too.

To be clear Lsbcal, I'm not talking about spending more or about not being frugal. I'm rejecting Bernicke's proposition that retirees spend less, in real terms, as they age. I think some do. But I think it is more realistic to assume you'll spend at your original budget level plus inflation.

I agree, there is no "correct" spending model for everyone. Just remember that the really important thing you're spending everyday is your time.

When you cut back real spending due to fear of market dips, pension plan defaults, political strife, meteor - earth collisions or whatever, and cancel a long awaited trip or other life experience, time goes by just the same.........

If it turns out that in your retirement, you slowly drop activities (travel, entertainment, funding grandchildren's 529b's etc, etc.) originally accounted for in your RE budget in favor of inexpensive hobbies done at home, so be it. I just wouldn't write that into my plan, despite the observation by Bernicke's FP's that many retirees walk down that path.

 

[rescueme]

...But I think it is more realistic to assume you'll spend at your original budget level plus inflation.

Agree...

 

[MasterBlaster]

The observations of spending reductions in retirement are more sophisticated/documented than some of the previous posts allow.

Here's the link to Bernicke's paper: http://www.fpanet.org/journal/articles/2005_Issues/jfp0605-art7.cfm

Some well reasoned anaysis over at the Boggleheads forum: Surveys of retirement spending - Bogleheads

I can't seem to find a link to the pathfinder Tacchino and Saltzman studies on this same topic.

There are also quite a large number of other papers in the financial press on this topic.

 

[youbet]

The observations of spending reductions in retirement are more sophisticated/documented than some of the previous posts allow.

Here's the link to Bernicke's paper: http://www.fpanet.org/journal/articles/2005_Issues/jfp0605-art7.cfm

Some well reasoned anaysis over at the Boggleheads forum: Surveys of retirement spending - Bogleheads

I can't seem to find a link to the pathfinder Tacchino and Saltzman studies on this same topic.

There are also quite a large number of other papers in the financial press on this topic.

I've scanned Bernicke's paper before. The lack of dispersion data is concerning. He generally talks about median patterns and I accept that his data is correct for medians. But I was concerned that my personal spending pattern, espcially in the first decade of retirement or so, would not follow the median data. So far, 5+ years into retirement I think I made the correct decision. Not only are we spending our original budget+, we have items on our bucket list we'd do now if we could afford to.

MasterBlaster, if you're anxious to stop pulling the plow (I can't remember if you're already FIRE'd or not) and using the Bernicke method allows you to FIRE earlier, go for it. You seem to have a good understanding of what Bernicke is saying and would be unlikely to be disappointed by the results (less real spending through time).

But I don't see Bernicke making the case that his data applies to all people. And I'm suspicious that ER types are less likely to fall into Bernicke's "median" stereotypes than folks who retire under more traditional circumstances.

I'm sure our spending pattern could change over time and possibly decline. Currently our proforma budgets call for continuation of current real spending levels and include some discretionary items such as travel, entertainment, hired services around the house and gifting. Only time will tell if we decide to scratch some of these things off simply because we don't feel like doing them / having them anymore.

 

[MasterBlaster]

MasterBlaster, if you're anxious to stop pulling the plow (I can't remember if you're already FIRE'd or not) and using the Bernicke method allows you to FIRE earlier, go for it. You seem to have a good understanding of what Bernicke is saying and would be unlikely to be disappointed by the results (less real spending through time).

YB: I'm just posting here about observed and documented general patterns. There is no suggestion as to what anyone should or should not do. Clearly the patterns don't apply to everyone. And like you, I have no intention of using any sort of declining spending model in my retirement plans.

For your info, I'm one of those that could retire but keeps working. Perhaps because my employment "doesn't suck" - to quote an unnamed other poster here on the forum. I suspect that when I do retire I'll have more income than I really need. But what a great option that would be ! I have thoughts of living large. Or in financial planner terms I expect that the hedonistic treadmill will apply bigtime.

 

[youbet]

YB: I'm just posting here about patterns. There is no suggestion as to what anyone should or should not do.

My interpretation of that is that everyone needs to make a personal decision as to whether they're going to fit "the pattern" or not. We thought we didn't. And through the first 5+ yrs of RE, that's been correct.

 

[harley]

My interpretation of that is that everyone needs to make a personal decision as to whether they're going to fit "the pattern" or not. We thought we didn't. And through the first 5+ yrs of RE, that's been correct.

In our case, the reason we haven't been upping our withdrawal rate through the first five years of FIRE is that we built in a significant budget safety net, and haven't needed to increase the WR yet. I'm sure there will come a time when our needs/desires will equal or exceed our income, and we'll start adjusting our WR. I suspect that's true of most of the others who aren't increasing withdrawals yet too.

 

[Huston55]

Damn Economists!

The consumer expenditure survey shows spending declines with age but income does as well, and the % of spending vs after tax income jumps at age 65 to 93% and by age 75 to 100%. In other words, spending falls because income falls. See the data here

"Consumer Unit" (what people are called in the data) Really?
That speaks volumes doesn't it?

Questions (especially for those already FIREd)---

What % of annual spending did you allocate to "discretionary" expenses, and how'd that work for you? What's your actual experience been?

 

[rescueme]

Questions (especially for those already FIREd)---

What % of annual spending did you allocate to "discretionary" expenses, and how'd that work for you? What's your actual experience been?

I'm retired 4.5 years thus far (as background info). DW (same age) can do the same, whenever she wants to pull the plug (but she's not emotionally ready as yet).

Starting, and continuing thus far, I/DW don't have discretionary expenses nor ever set aside a portion of our budget that could be reduced/eliminated if things did not work out. We planned for, and are spending 100% of our pre-retirement net income in order to live the life we planned for, over many many years, and are not willing to "give up" anything to meet that goal. For those that are wondering, we did "overfund" our retirement income needs.

Lucky? Sure, no doubt about it. However, I would also like to think that it also had something to do with our overall planning and saving/investment plan over the years (since 1982) and setting our expectations based upon our resources. While our joint income put us into a better position than most, folks we know that also had that income level decided to live "in the moment" and spend what they made at the time. Those are the folks (I assume) that are having problems today - even though few are retired. I guess you can say we're the little pig that built a brick house, rather than one made of straw or sticks...

It's a long-term plan, for an expected long-term retirement. Being very conserative (and fearful of the future, due to our joint upbringing experiences) helped achieve our retirement financial goal.

Since you asked...

 

[Alan]

Our discretionary budget is about 33% and if needs be it will be easy to cut back.

 

[Huston55]

Our discretionary budget is about 33% and if needs be it will be easy to cut back.

Thx Alan.

Our current retirement budget has about 30% of our expenses as discretionary versus essential.

Others have data points to share?

 

[Katsmeow]

The consumer expenditure survey shows spending declines with age but income does as well, and the % of spending vs after tax income jumps at age 65 to 93% and by age 75 to 100%. In other words, spending falls because income falls. See the data here

I don't think the conclusion necessarily follows. That is, it is surely true that for some (maybe even many) their spending falls entirely because of lack of income and not because of any other factor.

On the other hand, there are other possibilities.

For some people, maybe they figure out how much money they believe that they will personally spend in retirement and when they have sufficient assets or pensions or SS or combination thereof to hit that annual income they quit working. I think that is very likely true of many people here. If you think that you can live on $X a year and you have $X a year available, then the ideal would seem to be to retire and hopefully speed something close to 100% of $X each and every year. To continue working until the time you would two times $X in income each year would be working years longer than necessary.

FWIW, the above definitely applies to DH and I. We looked at the numbers and made projections of what we wanted to spend and based on that DH retired and I ESRed. Just didn't see a point to continuing to work to hit higher numbers.

I do believe the general trend of people spending less as they age. Just from what I've seen with my parents and other relatives, they slowed down and spent less as they aged. Not so much at age 65, but surely after age 70. Of course, that general trend is highly influenced by what you want to do during retirement.

We did do a major vacation this year. And, it was nice. But, truthfully, I don't want to do a lot of them. Maybe one more. It isn't, btw, that I want to "hunker down" or want to watch TV all day (I don't even have cable). It is just that most of the things that I enjoy doing don't require me to travel and are just not that expensive to do.

 

[thoreau]

Rotflmao!!! For the video of Stan Boreson!!

 

[unclemick]

1993 to 2010, ER age 49 to 68. Ballpark 12k - my personal best all time el cheapo yr in the 90's to 89k a remodeling yr plus new car post Katrina. Handgrenade around 2 to 6% SWR(4% benchmark) depending on my bellybutton indicator.

I suspect most posters to this forum have a range of wiggle room options they can use given they have approached the original question of ER - something a lot of the population has not even considered.

heh heh heh - I noticed my charitable giving has tended to go up with time also. Time in the market has slowly allowed a rise in my 'core expenses' but I can still vary my spending quite a bit.