Hedonic Tilt - Spend More Now, Less Later (in retirement)

[Midpack]

This has been mentioned in passing in a few threads, thought it might warrant it's own discussion. It just factors in the desire to spend relatitively more on the front end while we're more active/able and accepting and planning on lower spending later when travel and other activities that will be too physically demanding. Not for everyone of course. Lots of ways to build this into a plan, here's just one example with numbers...

https://assetbuilder.com/knowledge-center/articles/-how-to-spend-more-now-less-later

Allow me to introduce the Hedonic Tilt. That’s a formal title for what most of us want to do in retirement. We want to spend more now, while we can enjoy it. And we’ll cope with spending less later, when our ability to enjoy spending may have gone by.

It’s an entirely reasonable desire. The only problem is that if we get too enthusiastic about spending today, we might have a really big problem in the tomorrow we don’t want to think about.

Fortunately, there is a simple solution: take a constant amount from your retirement funds and adjust, slowly, to the slow loss of your higher purchasing power.

 

[W2R]

Fortunately, there is a simple solution: take a constant amount from your retirement funds and adjust, slowly, to the slow loss of your higher purchasing power.

There's another simple solution. Retire with enough money that you can have what you want and need, both now and in your later years.

Of course, that assumes non-infinite consumer urges, an attitude that Madison Avenue types probably regard as being completely despicable. One would have to settle on some particular lifestyle as being "enough".

How dreadful to contemplate the retiree who has no desire for a Lamborghini, a trip around the world, or a giant mansion, but instead is completely happy and fulfilled with only a used Toyota, a trip across town, and a modest home. It's almost unpatriotic.

 

[Senator]

There is also the fact that no one will ever starve in the USA. Or be without the basic necessities. Worse case, there are reverse mortgages, credit cards, etc. to fall back on when you only need to spend the minimum.

Spending money now while you can enjoy it makes sense. I am not sure if I would like being told 'no' when I want to go on a trip at 80, so I save. Or having to live in a downtrodden, unsafe area I would not like.

But from a 'being able to live' perspective, even if you are 100% out of money, you can do fine.

 

[Danmar]

I don't think you have to mention Lamborghini's, around the world trips, or giant mansions. Many people might like to spend a little more in the early years of retirement. A new car, modest trips, etc. It's not a mortal sin to spend a bit of money as long as you can afford it.

 

[ElizabethT]

We've given this a fair amount of thought, and simply can't envision this occurring. What we imagine will happen in our case, is that our spending will either remain flat, or possibly even tilt upward. The reason being that in our 'younger' years we're likely spending less because physical pursuits, which deliver a heck of a lot of buck for the bang, are relatively inexpensive. If/when physical decline occurs, I see us turning more frequently to all-in type of trips instead, likely in the luxury category. Similarly, I can see us upgrading our RV and cars, and funding family vacations to ensure quality time with the grandkids.

If anything, I feel like our ER years should be our leaner years, given all this.

 

[Sarah in SC]

I see this as very reasonable, based on our own experiences and that of our parents, and it will likely be how we arrange our spending when I finally pull the plug on work.
We want to do bigger, more difficult travel early on, and will likely pull back to lesser travels as we age.
I don't expect to live over-long, and DH is 8 years ahead of me.
"Gather ye rosebuds while ye may" and all that.
I don't have much interest in home renovation, big household projects, elaborate hobbies, and the like, so travel and spending time with friends are really our only large cost categories, now. I don't see that changing dramatically as we get older.

 

[DrRoy]

I believe that studies I have seen on retirement spending do bear out that on average spending does decline in later years as you do less, except for medical costs. However, the average can mask a lot of individual variation.

 

[Gone4Good]

Lets try a hypothetical and see how it feels . . .

"I know I can't really afford to buy a new BMW now but I can still make the numbers work if I promise that I'll buy a used Hyundai as my very next car when I'm older and not quite so hip."

 

[GrayHare]

After decades of modest living it feels unnatural to spend freely. If I can be content at less than a 4% WR I'm not going to invent ways to spend more.

 

[Markola]

Affording "Travel" seems to be assumed as a tradeoff here but there are plenty of ways to travel that are much more fulfilling and lower cost than the Four Seasons kind. Just use one's frugality skills for "Travel" as in every other sphere, and go.

 

[CaliforniaMan]

Lets try a hypothetical and see how it feels . . .

"I know I can't really afford to buy a new BMW now but I can still make the numbers work if I promise that I'll buy a used Hyundai as my very next car when I'm older and not quite so hip."

or maybe exchange "new BMW" with "1966 Mustang Convertible"

Have a friend that got into this, and really enjoys all the trips and car shows camaraderie. And with this car you will still be cool no matter how old you get!

 

[Midpack]

Lets try a hypothetical and see how it feels . . .

"I know I can't really afford to buy a new BMW now but I can still make the numbers work if I promise that I'll buy a used Hyundai as my very next car when I'm older and not quite so hip."

Since DW and I have owned BMW, Audi & Volvo's in the past, and we've owned nothing but basic Toyotas and Hondas since 2001 - we can demonstrably say yes to your hypothetical. I am sure many here can.

Caveat: Some people need to experience the $$$$ premium (and sometimes more frequent) to maintain a marquee car firsthand to be convinced they can readily do without - I confess we needed to learn the hard way.

 

[Gone4Good]

Since DW and I have owned BMW, Audi & Volvo's in the past, and we've owned nothing but basic Toyotas and Hondas since 2001 - we can demonstrably say yes to your hypothetical. I am sure many here can...

Is it quite the same thing, though?

Certainly downsizing your current lifestyle to work towards early retirement makes a lot of sense to most everyone here. But promising to downsize in the future so you can spend more today sounds like the opposite of that. It actually sounds a lot like what many folks who can't afford to retire do.

I'd worry that I was just rationalizing lifestyle creep.

And I'd also add that people are terrible at projecting their future needs and wants. Downsizing today because I'm willfully choosing to spend less is a completely different thing than being forced to spend less in the future because younger me decided I wouldn't need the cash.

 

[hurricane harry]

The older I get the less I need. Of course a good hobby is important.
I value my freedom more than material goods.

 

[Meadbh]

Sometimes I think I would like to upgrade to a luxury home. And then I think "well, if I had worked five more years......nah!"

But maybe I could splurge a little bit without worrying about running out of money. Like maybe a new TV or another trip.

 

[Katsmeow]

Here is a recent article where Burns follows up on and discusses Hedonic Tilt (it is at the bottom of the article). Most of what this article is pointing out is that if you are 65 and have, say, a portfolio with a 95% chance of surviving 30 years, the true likelihood that you will actually run out of money in 30 years is not 5%, rather it is less than 1% because you are unlikely to live that long. He runs through some calculations showing the chance of actually going broke by combining portfolio survival with life expectancy. And, he shows that if he uses his hedonic tilt method, you can withdraw much more in the early years.

https://assetbuilder.com/knowledge-center/articles/live-long-spend-freely

 

[youbet]

I think resource consumption, both on what and when, is a highly personal thing. Folks that think that their way must be the "right way" for everyone need to develop a bit of awareness about the world beyond themselves.

I've been fully FIRE'd for almost 10 years and DW for 13. As we look back on our lifestyle decisions, we have fewer regrets over resources consumed early that we wish we hadn't than opportunities missed where we wish we would have.

Although our regrets are very few, given the chance for a "do-over" we'd likely go ahead and experience some things while younger that we passed on this time around.

Everybody calls their own shots and lives with the consequences. And everybody is different in regard to justifying the outcome in their own minds.

 

[Amethyst]

We find that our spending on things has already gone way down, but our spending on services (other people doing things for us that we either used to do, or never knew how to do) has gone way, way up.

Example: We just got a quote for mowing our 3-acre lawn: $290 per mow. Over a season, that adds up to the cost of a very nice lawn tractor. So we are going to buy one.

 

[Moemg]

I see this as very reasonable, based on our own experiences and that of our parents, and it will likely be how we arrange our spending when I finally pull the plug on work.
We want to do bigger, more difficult travel early on, and will likely pull back to lesser travels as we age.
.

That is a great idea . I am so glad I did all the adventure travel in my 40's & 50's . Let's face it white water rafting is not as much fun at 69.

 

[youbet]

That is a great idea . I am so glad I did all the adventure travel in my 40's & 50's . Let's face it white water rafting is not as much fun at 69.

In this pic, taken last autumn on the Nantahala River (NC), DW and I are both 68 yrs old. It was still fun. Admittedly, 5 yrs ago we would have been doing it in our kayaks and without the guide!

But, I agree, procrastinating on experiences likely best enjoyed when younger just to have "extra padding" in the FIRE portfolio later is risky business. We've really cut back on our paddling adventures due to back problems I've developed and DW's shrinking "sense of adventure."

BTW, I'm the guy in the blue baseball cap in the left front seat. DW (who picked her seat based on not wanting to experience as much frigid water) is in the left rear seat in the light colored Tilly hat. We were on a camping trip to Smoky Mountain National Park with some friends (who are with us in the raft).

 

[Teacher Terry]

We have been semi-retired for 4 years and have been doing more traveling then in the past. Last year we took 2 big trips of a month each. This year we will do an Alaskan cruise and a rv trip. DH is 58 and I will be 62 soon. All the studies show that people don't travel nearly as much in their 70's. Also we have been going to Europe while we are physically able to climb the tower of Pisa, etc because we don't know how long we will be able to do those types of things. We took a cruise and there were a lot of old people in terrible shape with walkers, wheelchairs, etc.

 

[Gone4Good]

Here's the recommendation:

The planner tells [John and Jane] that they might be able to spend about 4 percent a year, or $40,000, from their fund. “You’ve got a 95 percent chance of being able to spend that much, adjusted for inflation each year, for 30 years. . . .

There’s only one problem.

John and Jane would really like to spend $60,000 a year from their fund

Is there a solution?

Yes. And it’s simple. Increase the annual income withdrawal, but don’t adjust for inflation. Make it a constant amount. If they do that, they can withdraw more than $60,000. They can take $68,750 every year for 30 years and still have a 95 percent probability of not running out of money.

So what does FIRECalc say about drawing $60K without inflation adjustments versus 4% with the normal inflation adjustment?

It doubles the probability of failure from 4.3% to 8.7% for a 60/40 portfolio over 30 years.

It shortens the minimum length of time until 1st portfolio failure to 17 years from 25 years.

It reduces the median portfolio value after 10 years to about $1.1MM from 1.3MM

It generally reduces total nominal spending over a 30 year period even though it fails more frequently.

30yrs Starting	$60K Fixed	$40K + CPI	% Diff
1900	1,800,000	1,926,175	-6.6%
1930	1,800,000	1,419,181	26.8%
1960	1,800,000	2,649,352	-32.1%
1980	1,800,000	2,332,288	-22.8%

On the plus side, that nominal spending is significantly front end loaded. And total nominal spending can be higher during periods of deflation. Or it can be significantly lower during periods of high inflation.

All of the above is also completely dependent on the retiree's discipline in implementing a declining standard of living for the rest of their lives. Failure to maintain that discipline will worsen all of these results.

Whether or not this is an acceptable risk is of course a personal preference.

 

[braumeister]

We took a cruise and there were a lot of old people in terrible shape with walkers, wheelchairs, etc.

In all fairness, there are also a lot of old people in great shape. I'll never forget a week-long rafting trip we took through the Grand Canyon about ten years ago. One of the guys on our raft celebrated his 75th birthday during the trip, and was one of the strongest climbers in the group on our daily hikes. We asked him how he managed to stay in such good condition, and his answer was that he lived in Phoenix and ran up Camelback mountain almost every morning before breakfast.

 

[HadEnuff]

In this pic, taken last autumn on the Nantahala River (NC), DW and I are both 68 yrs old. It was still fun. Admittedly, 5 yrs ago we would have been doing it in our kayaks and without the guide!

But, I agree, procrastinating on experiences likely best enjoyed when younger just to have "extra padding" in the FIRE portfolio later is risky business. We've really cut back on our paddling adventures due to back problems I've developed and DW's shrinking "sense of adventure."

BTW, I'm the guy in the blue baseball cap in the left front seat. DW (who picked her seat based on not wanting to experience as much frigid water) is in the left rear seat in the light colored Tilly hat. We were on a camping trip to Smoky Mountain National Park with some friends (who are with us in the raft).

Love it...BTW, the guy in the back doesn't look like a spring chicken.

 

[FreeBear]

That is a great idea . I am so glad I did all the adventure travel in my 40's & 50's . Let's face it white water rafting is not as much fun at 69.

I was an avid backpacker and mountain biker during much of my w*rking years, but only had a few weeks of vacation yearly. Now, both DW and I are FIRE'd but travel has become more of a pain. We've become high maintenance (eg: can this be served gluten-free, dairy-free, vegetarian?) and we haven't camped sleeping on the ground in a decade (bad back). Even non-camping travel has become a headache. Perhaps we've just gotten lazy and have different priorities now in ER.

I do miss sleeping beneath the stars and waking to sunrise in the mountains. I just can't bring myself to offload the last of my backpacking gear...

So, if you have adventurous travel of any kind, go for it while you can. Who knows what will change later in life!