Decreasing Spending Model?

[stil190]

Hi All,
My first post! Been reading on this site for several months. Really happy I found it. Very insightful. I am targeting a 1June17 date to stop working. But it sure is a scary idea. The increasing interest rates are impacting my pension. So pushing me along a little faster than my original plan. Over the past 6 months I have been busy worrying and using every retirement calculator I can find. All calculators, including FireCalc, give a very favorable success rate.

I was wondering what most people think about the spending model. One option in FireCalc is to use a decreasing spending model. To me this seems consistent with my observations of others as they get older. If I model with this assumption, we could increase our planned initial spending. However at 56 not sure I am comfortable thinking that my spending will decrease for the next several years. However maybe in 10+ years... maybe that would be true. What is the thinking about spending modeling?

Thanks.

 

[CaptTom]

I retired last year at 56. My own observation is that many of the models are overly generous; in other words, they tend to assume you'll be spending the same in retirement as you did before. I guess if you travel a lot or otherwise increase your spending in some areas, to make up for the ones you cut down on (commuting, etc.) then it makes sense.

I took the other approach; what will my actual needs (and some wants) be in retirement, and can I fund those, factoring in a reasonable assumption on inflation. Once I had those numbers fleshed out, it was just getting up the courage to pull the trigger. And frankly, it didn't take much courage.

I didn't really spend much time with the standard models. It was more like I made up my own.

For what it's worth, I've been doing things I've always dreamed of doing, but staying within my budget, for almost a year now. I may even pick up a few bucks doing professionally what used to be more of a hobby.

 

[whatnot]

stil190 - Hi and congrats on your retirement plans! My DH has a pension and we are planning on retirement in 12-18 months. So I am curious what your comment below means.
"The increasing interest rates are impacting my pension. So pushing me along a little faster than my original plan." Can you explain how interest rates impact pension calculations. I had not heard this before. Thank you.

 

[RunningBum]

I took the other approach; what will my actual needs (and some wants) be in retirement, and can I fund those, factoring in a reasonable assumption on inflation. Once I had those numbers fleshed out, it was just getting up the courage to pull the trigger. And frankly, it didn't take much courage.

I didn't really spend much time with the standard models. It was more like I made up my own.

^ This. Figure out for yourself what you'll be doing and how much you'll spend. Not working leaves more time for travel and leisure activities. Some of those activities are cheap, many are not. You've got a long time before your later years when you'll be less active, but even then you may increase spending in some areas to keep yourself more comfortable, or to take care of things you can no longer do yourself.

 

[2017ish]

Agree. Models are a guide; rule of thumb. Generally speaking, most people will decrease spending as they age, and I fully expect that will be as true for us as it has been for my in-laws. BUT, for us the idea that discretionary spending will start decreasing at 56, as in the Firecalc model, is simply wrong. It will increase at retirement, and hopefully not decrease until late 60s or beyond (subject to portfolio performance, as well as health)....

You really have to start with your own projected numbers.

One way to feather Firecalc when modeling decreasing spending is to cheat with a retirement age 10 years younger or so, with projected death at, say, 90 versus 100.

Congrats on your impending retirement!

 

[stil190]

stil190 - Hi and congrats on your retirement plans! My DH has a pension and we are planning on retirement in 12-18 months. So I am curious what your comment below means.
"The increasing interest rates are impacting my pension. So pushing me along a little faster than my original plan." Can you explain how interest rates impact pension calculations. I had not heard this before. Thank you.

Hi WhatNot,
In my case, the pension can be obtained in one of two ways. As an annuity or a lump sum payment. My understanding is the annuity is not effected. However the lump sum (which would be calculated as the present value of the annuity payments) is significantly impacted by the interest rate. Actually the rates are from an IRS website.

Hope that helps to clarify.

 

[stil190]

Agree. Models are a guide; rule of thumb. Generally speaking, most people will decrease spending as they age, and I fully expect that will be as true for us as it has been for my in-laws. BUT, for us the idea that discretionary spending will start decreasing at 56, as in the Firecalc model, is simply wrong. It will increase at retirement, and hopefully not decrease until late 60s or beyond (subject to portfolio performance, as well as health)....

You really have to start with your own projected numbers.

One way to feather Firecalc when modeling decreasing spending is to cheat with a retirement age 10 years younger or so, with projected death at, say, 90 versus 100.

Congrats on your impending retirement!

Thanks for the suggestion on how to cheat Firecalc. Great idea.

 

[whatnot]

stil190 - Thank you for your response. I was hoping that would increase his pension payment. oh well..

 

[Teacher Terry]

We semi-retired 5 years ago and now have more time for the things we want to do. So we are spending much more $ on fun and travel then before. It would be sad to finally have the time but not the money to do things you want. That may change in our 70's but who knows.

 

[Winemaker]

Congratulations! But please don't ever mention w*rk again.

 

[kaudrey]

I am not yet retired but my retirement spreadsheet is built using a "U" shaped spending model - more in the early years (I plan to travel a LOT); less in the middling years (say 70-80, when we don't travel as much but are still fairly healthy)) and more in the later years (health care costs).


This is consistent with what many of the relatives in the generation before me faced/are facing. YMMV, as will mine, but it seems like its a scenario that a lot of people face.

 

[MichaelB]

I think a decreasing spending model is compelling for some (becuse it allows more spending now) but risky, and not part of a conservative plan. I also think the conclusion that spending declines with age is in part the result of declining income.

Just my $0.02

 

[Cobra9777]

I agree with others... the models are a good place to start, but you should map out your own unique spending profile if you really want to be confident in your decision about planned initial spending.

In my case, I've tracked actual spending in about 20 categories for most of my adult life. I also forecast spending through age 100 using the same 20 categories in an Excel spreadsheet. Each category is projected using: (a) a measure of consumption, quantity, or some other cost driver; and (b) a pricing component based on current price plus a unique rate of inflation. The rates of inflation by category come from bls.gov with some judgment on my part in certain categories.

The spreadsheet also comprehends life events, such as downsizing the main home, which impact many categories of spend. I even include things like the additional over-65 property tax exemption here in Texas, transition to Medicare, etc. I don't attempt to forecast the specific timing of large one-shots like a new roof or new car. I just look at the history of that type of spending and include an allowance equal to the historical average.

Basically, I just systematically went through each category, analyzed historical patterns with emphasis on recent trends, and then asked myself how is this category likely to change in the future, if at all. If you think this through for each category, it's fairly easy to identify a measure of consumption separate from price. For example, I have the inflation rate for gasoline set fairly high, consistent with bls forecasts. But the overall projected spend is relatively flat because I assume we drive fewer miles over time, and that the cars we drive in the future will be smaller and more fuel efficient.

When I graph the result of this exercise against a simple assumption of total current spend + X% inflation... the two are drastically different. The more detailed analysis is much higher in the early years (travel, home improvements, hobbies), flattish in the middle (consumption slows, downsize the house), then significantly higher in the later years (if we are fortunate enough to live that long)... mostly driven by a crazy medical inflation rate combined with the assumption that we'll consume more medical services.

 

[2017ish]

...I also think the conclusion that spending declines with age is in part the result of declining income.

Just my $0.02

That also was my thought when I first ran across the Bernicke "smile" literature. I think Blanchett's research is strong in the other direction though--as summarized by Kitces, it finds the spending decrease strongest among more affluent retirees, who apparently curtail traveling and other discretionary expenditures: https://www.kitces.com/blog/estimat...penditures-and-the-retirement-spending-smile/

Like you, I am not claiming omniscience on this though.

 

[Nature Lover]

I agree with others... the models are a good place to start, but you should map out your own unique spending profile if you really want to be confident in your decision about planned initial spending.

+1. Everyone's spending pre/post retirement can be different. Both recurring and one-time spending can vary greatly.

I was relatively frugal before retiring and remain so....but have (what to me is) significant untapped discretionary spending capacity. Retired in late 2015 at 55; and at only 18 months in, I am still enjoying the incredible amount of time I have to enjoy daily life. Never been much of a traveler; and enjoy time with family and friends, hiking, and getting outside.

At this point, I have a greater potential of increasing spending in the years to come than reducing them.

NL

 

[Gill]

In our experience, the desire to travel is one item that changes with age. In our 60's and early 70's we couldn't wait to book the next cruise and sometimes spent several months of the year at sea. We also had quite a collection of motorcycles and rode them daily. We have sold all the motorcycles and our last cruise was at 73 and 69 respectively and since then we've had no desire to even leave home. I guess we got it out of our system, although now we spend nearly as much money on golf, country club membership and frequent dining out.

I really didn't see it coming but, fortunately, we both tired of travel at the same time and are content to enjoy our home, two luxury cars and the beautiful area where we live.
Gill

 

[CaptTom]

It would be sad to finally have the time but not the money to do things you want. That may change in our 70's but who knows.

It would be sadder to have the money, and not the time.

Just sayin'

 

[NW-Bound]

... at 56 not sure I am comfortable thinking that my spending will decrease for the next several years. However maybe in 10+ years... maybe that would be true. What is the thinking about spending modeling?

I made sure that I can sustain the same spending for 30 years, even though

1) I don't think I will live for another 30 years. My wife, maybe.

2) I am spending way less than FIRECalc says I can, particularly when future SS is taken into account.

3) My spending will decrease in the future.

Loving to travel as I do, I can see myself having only a few more years. I doubt that I will still stay as gung ho about travel when I get to 70.

All this means I have a very safe margin. If I have lots of unspent money, that's OK. I love to count money, and when I get tired of it, I will speed up the charity donation and giving to my children. I am not going to spend money just for the sake of spending.

 

[Terryjm51]

I agree the interest rate has change my thoughts on retirement!
Increased rates drive my lump sum DOWN i am 55 and turn 56 end of year but if interest rates keep going up I may have to bale !!


Sent from my iPhone using Early Retirement Forum

 

[growing_older]

I think people willing to spend a lot on travel have different spending models than other retirees. In my personal experience, retirees with limited means show a decrease in spending as they age and are less inclined to spend money on outside activities, or perhaps as their belts tighten with fixed incomes. Retirees with relatively unlimited means still have a decrease in spending on activities as they age into a more quiet lifestyle, but it is more than compensated for my increased expenses on services and household assistance. Medical spending is a wildcard for all and only seems to go up, sometimes precipitously as they age.

 

[Teacher Terry]

By 80 my Mom slowed down her traveling a lot and by 84 quit traveling. She did most in her 60-70's. By 80 it got to be a lot of work to pack, etc. Right now we spend 10-14k/year on traveling which is something we have never done before. I plan on doing it while we enjoy it and our health is good enough. We don't have any expensive hobbies.

 

[youbet]

I think a decreasing spending model is compelling for some (becuse it allows more spending now) but risky, and not part of a conservative plan. I also think the conclusion that spending declines with age is in part the result of declining income.

Just my $0.02

Totally agree with your $0.02.

Ref your comment about declining income (above, bolded), I think this sometimes occurs due to inflation. For folks who FIRE with significant non-COLA'd pensions and who invest very conservatively, 10 - 15 years of inflation (especially if the first few years have the highest inflation) can lead to much reduced purchasing power even if income is nominally about the same.

I can think of anecdotal examples of folks spending the same, more and less as they age in retirement. (Spending = purchasing power, not nominal dollars.) It depends on personal circumstances.

At our house, DW fully FIRE'd at 55 and I fully FIRE'd at 58. Now both 70ish, we're spending (real, not nominal) as much as ever and really would spend more on travel if we could afford it. We're always eager and ready to go but have done (and continue to do) frugal traveling as much as we care for. We could easily book $20k of additional higher tier trips the balance of this year if they were in the budget. At the same time, we have no regrets spending what we did when we were younger. Unless you have unlimited resources, it's a balancing act, a trade-off.

 

[audreyh1]

Well, I'm planning on blowing big bucks on a CCRC when my traveling starts to self-limit due to age. So I don't see my spending going down. It will just reorganize. I expect we'll be paying a big chunk up front for the CCRC - some of which should eventually go to our heirs, but won't be available for our use while we are alive.

We don't have kids. I have to have everything in place for us before we get too old. I have younger siblings, and very young nephews, but I really don't expect much familial support other than maybe having someone that can check up on us a few times a year.

 

[braumeister]

Well, I'm planning on blowing big bucks on a CCRC when my traveling starts to self-limit due to age. So I don't see my spending going down. It will just reorganize. .

This is exactly my situation, and the reason I do my planning on the constant spending model.

 

[NW-Bound]

I have adult children who hopefully still live nearby when we become invalid. They will look after us, and who I hope will arrange a one-way trip for me to the Netherlands or Oregon if that becomes my wish.