US News Article: Socking Too Much Away

[REWahoo]

The May 29 issue of US News & World Report has an article on saving too much for retirement:

http://www.usnews.com/usnews/biztech/articles/060529/29saving.htm

It is primarily about Bernicke's report of declining spending as retirees age. A couple of interesting quotes:

Over the years, financial adviser Richard Ferri has seen a few clients go to that great retirement community in the sky. And they have all left behind something: money. Lots of it. "We've never had a client die with less money than they retired with," says Ferri, who works in Troy, Mich. "If they retire with $2 million, they end up with $4 million. The value of the account goes up more than they anticipated, and they don't spend as much as they thought they were going to spend."

Dory, this one may interest you as it refers to retirement calculators... and makes a point that no generally available calculator allows for reduced spending calculations. Obviously USN&WR is not aware of your recent hard work.

Bernicke is not aware of any free or low-cost calculators that don't make the traditional assumptions [that spending will not decline]. (According to Bernicke, some financial companies have adjusted their planning software to take into account his report on spending patterns, but the software isn't designed for the public to use.)

 

[d]

Also from the article: Mandatory IRA distributions, for example, can take a huge bite by bumping up a retiree's tax bracket, financial adviser Ferri says. "That's what's really going to whack retirees down the road. It's unbelievable when you run the numbers," he says. "For those who have large IRAs, the big hit for them is not medical or housing. It's taxes."

 

[youbet]

We may not run out of money, but we will run out of time!

You bet we will!  You can count on it.

youbet

 

[SteveR]

Plan your expenses based on as much historical data as you can with the intent of projecting your first 5-10 years of expenses.

Do the same for income.  Compare the two.  Where there are gaps...reduce spending or find ways to increase income.  If there is a positive cash flow then invest or spend based on your estimates of income potential and spending projections.  Adjust to keep expenses=income.  

Like C-T said, don't go nuts with your projections.  If you assume every year will be 1929 and your expenses will double every couple of years you are not doing it right.  Keep it simple and keep it as real as you can with whatever padding lets you sleep at night.  

Personal note:  my projections for the next 10 years show a pretty stable level of spending and income that is close to my pre-RE levels.  After that, both will drop by 50% and stay that way for another 10 years where they will drop by about 20% and level off for the remainder of my retirement.  I planned this level of spending to match my desired income level for the next 20 years.  I can adjust my expenses on a dime to hunker down when the market is down without really affecting my life style.  Knowing what to expect and projecting income-expenses 30 years out creates the confidence for me to ER without sleepless nights.  

Do what works for you but try to keep it close to reality.  

 

[haha]

The May 29 issue of US News & World Report has an article on saving too much for retirement:

http://www.usnews.com/usnews/biztech/articles/060529/29saving.htm

It is primarily about Bernicke's report of declining spending as retirees age.

Here is a summary of the so called Bernicke report, from the US News article referenced above.

"In a report published in the Journal of Financial Planning last year, Eau Claire, Wis., financial planner Ty Bernicke examined federal statistics and discovered an assumption-bursting fact: Seniors actually go through less money as they get older. By contrast, many financial advisers figure that retirees will spend at the same rate until they die, and they rely on this conventional wisdom in crunching numbers."

This sounds really wonderful, but I wonder how much information there actually is here? First, what a great practice builder for an FP! Always easier to tell your client he can gorge on steak rather than to counsel hamburger with H-Helper. Second, these are people a generation or so older than most of us. What was different then? Former employer coverage of retiree health care, lower cost of health care, low inflation and pensions to name just a few things.

Also, note that the categories of spending that supposedly go down are discretionary. I can't think of one necessary expense that would likely be less for an older than for a younger retiree. (Except Health insurance for those too young to qualify for Medicare.)

Grass need cutting?  65 yo cuts it, 80 year old pays to have it cut. Same with gutter cleaning, painting, etc..  I don't think it matters one whit what some group supposedly does, what matters is what you may personally be looking at. And for most of us to be comfortable, since we don’t know what our individual experience will be, we have to over fund it.

Ha

 

[Cut-Throat]

Grass need cutting? 65 yo cuts it, 80 year old pays to have it cut. Same with gutter cleaning, painting, etc.

I have not cut any grass since I was 35 years old! - I live in a Townhome assc. and we already pay for all of the items you listed.

Keeps us from hurting our elbows starting the mower

We're saving even more!

 

[cute fuzzy bunny]

"We've never had a client die with less money than they retired with," says Ferri, who works in Troy, Mich. "If they retire with $2 million, they end up with $4 million.

I wonder what percentage of retirees have a big bucks financial planner like Ferri. Further, it seems like someone with $2M and up would be doing pretty well for themselves.

Tough to extrapolate this to the average person saving too much or even enough.

I do think most people will spend less as they age. I'd hate to make too many assumptions, save too little, and find myself out of money at 85, or at that age find that my money no longer has enough buying power to make ends meet.

Like Ha says, I'm pretty sure i'm going to get to the point where doing my own car repairs, fixing my own roof, and painting my own house arent going to be possible...let alone a lot of fun. And I may not be so excited about turning out three meals a day and cleaning the house with my own hands.

So perhaps my costs will pop up at some point in retirement when I become physically feeble.

 

[haha]

Keeps us from hurting our elbows starting the mower

LOL! Sounds like a plan, especially since I am still spending a lot of time with my elbow in a bucket of ice!

Ha

 

[dory36]

Thanks for the link. I emailed Ty Bernicke and told him there was at least 1 free calculator that incorporated his work.

(By the way -- it was "Sam" on our forum who suggested adding it -- thanks much! I'm willing to add almost any test or modification if (a) it is self-evident or based on sound research, (b) I can understand it, (c) I can program it, and (d) the data are available to do so.)

And speaking of mowing lawns -- when someone asked why I was spending all this time on FIRECalc, I explained that the alternative was to mow the lawn.

 

[Nords]

This sounds really wonderful, but I wonder how much information there actually is here? First, what a great practice builder for an FP! Always easier to tell your client he can gorge on steak rather than to counsel hamburger with H-Helper. Second, these are people a generation or so older than most of us. What was different then? Former employer coverage of retiree health care, lower cost of health care, low inflation and pensions to name just a few things.
Also, note that the categories of spending that supposedly go down are discretionary. I can't think of one necessary expense that would likely be less for an older than for a younger retiree. (Except Health insurance for those too young to qualify for Medicare.)

I still don't think Bernicke adequately addresses the issues of healthcare, especially prescriptions, and long-term care/assisted living. The foundation of his entire study is built on financial analyzer's anecdotes.

I wonder what percentage of retirees have a big bucks financial planner like Ferri.

I'm no Ferri shill, but he frequently posts at the Vanguard Diehards and this subject comes up all the time. His fees are actually pretty low as financial advisors go.

If there's one good thing about the VD board, it's watching Ferri & Swedroe b-----slap each other about bond returns or diversification correlations. It's not quite as bad as 1 AM at a biker bar during Sturgis but it's only one small step below. They claim to be good friends, but sometimes it's like watching Wab & SG tag-team TH...

 

[modlair]

Concerning a study that says retirees will likely spend less.

It is based on history. That history has fully pensioned retirees with company covered healthcare pre Medicare. They own homes they bought for $45,000 30 years ago. They own them free and clear.

So these folks are immune to housing increases and Medicare + company retirement supplementals buffer the healthcare cost increases. Well, what is left?

Food? Do people spend more on food as they age? If so, not by much.

Utilities? Yeah, they will indure this inflation.

Travel? Perhaps the ultimate discretionary item, and yes, one will take fewer cruises to Antarctica at age 80 than at age 68. In fact, those are pricey. Doing them and then not doing them will subtract a big number off spending in later years.

How appropriate is it to project this? I think it's shaky. Company pensions and paid healthcare supplements to Medicare are disappearing. Housing? Aren't condos with annual maintenance fees now becoming a norm that was not ubiquitous in the past? Those fees will go up annually.

The cruise cost cut will still be there.

Overall, I think this concept is being overdone. It's good to know that there is a tendency that matters, but in the future maybe it just attenuates inflation rather than reversing it.

 

[jdw_fire]

At the end of the article there is a link to the breakdown by category of the spending changes relative to age which I have attached here

Average Annual Household
Spending By Age                     55-64 65-74 75 and over
Apparel and services                $1,863 $1,200 $604
Cash contributions                    1,752 2,471 1,542
Entertainment                           2,823  1,879  990
Food and alcohol                        6,355 5,200 3,708
Healthcare                                  3,262 3,799 3,995
Housing                                     14,339 11,152 9,381
Personal insurance and pensions    5,825   2,348   856
Transportation                            8,421   6,506   3,286
Other                                         2,661 1,956 1,399
Total Average Spending*            $47,299 $36,512 $25,763

What is notable is that all the categories except for two decline across the board.  The exceptions are healthcare, which increases across the board and cash contributions, which goes up and then down.

 

[rs0460a]

What is notable is that all the categories except for two decline across the board.  The exceptions are healthcare, which increases across the board and cash contributions, which goes up and then down.

Actually, it does make sense....  It's a good bet that your healthcare $$$ will go up in the future.  As far as the "cash contributions", this is where "granddad/mother" ante up to help their "kids" with their own "desires", along with throwing some education $$$ at their grandkids.

- Ron

 

[audreyh1]

I think my travel expenses will go UP as I age.

Why?

Now I'm more into "doing my own thing" - exploring on my own, doing my own planning, transportation, etc. This can be an economical way of travel. Plus I already have a (paid for) RV, and that makes lodging and food very cheap.

As I get older, I expect I'll start taking advantage of nature cruises and safaris - all expenses paid trips where there is always someone to carry my luggage and help me out of the van. This kind of travel is FAR more expensive. And I don't particularly enjoy traveling that way now, but I expect I'll be grateful for it in 20 or 30 years.'

Audrey

 

[modlair]

Well, wait a minute. Yes, all categories showed an effect, but the total per year looks like 9-10K and almost all of that was explained in housing, insurance and transport.

Discretionary travel (cruises) doesn't show, unless it's entertainment.

Housing wise . . . one supposes they paid down their mortgage and more and more of each house payment was principal and not interest. That is an automatic reduction in spending because principal is just a payment to oneself. But again, I think this is history. The modern retiree is in a condo enduring increasing maintenance fees -- and he may buy the condo free and clear. I am not sure the future of housing expense will show such a big decrease (30% of total decrease).

Insurance . . . I guess I hadn't thought of it. You can't get life insurance as you're older. So sure, that is an expense that gets erased.

Transport . . . people stop driving. I'm surprised it's that much of a drop, but so it goes.

 

[tryan]

Under one traditional prediction model, a couple who spend $60,000 a year and have $800,000 in 401(k) savings at age 55 would have only a 13 percent chance of having enough money to make it to age 85, assuming that their spending habits remained constant. But the chances of success--making it to age 85 with enough money--jump to an impressive 100 percent when the model assumes that the couple will spend less over time.

WOW ... 7.5% SWR !?!  Some how I don't see this working out for us.

 

[astromeria]

The decrease in spending with age depends on circumstances. Without a pension, employer-subsidized health care, or downscaling one's life, expenses are apt to go up rather than down, epsecially if health seriously deteriorates in the younger spouse or in a single person without family to take care of him/her.

When they first retired, my parents spent $55-60k/year on ~$500k investments (75% fixed income) and ~$30k/ Social Security. Now it's just my Mom, and she spends $40-45k/year on ~$500k investments (still 75% FI) and $16k SS. When my parents first retired, they had a mortgage (from a major remodeling) and high taxes, entertainment, and personal expenses (hair salon, clothing, tchatchkes) in a NYC burb. They greatly reduced expenses by buying a house for cash in South Carolina, reducing personal expenses, and as my father became more frail, traveling and entertaining less. Now my 80-yr-old Mom travels virtually nil, attends fewer events, drives a lot less, and has a tiny grocery bill (lunch out pretty much daily and eats little else). As a single orderly person who rarely cooks, she hires her cleaning lady once every 6 weeks instead of once every 1-2 weeks. But she was there to care for my ailing father, 12 years her senior. When her health deteriorates, my husband, brother, and I can help, but we're apt to hire home health aides.: not cheap

 

[d]

The article and referenced data notwithstanding, I am not convinced of the conclusion reached:

1. Ferri’s clients are not likely to have retired at the worst possible dates (approx 1929 and 1964) as his practice started during more “normal” times, in the late 90’s (?)

2.  A FIRECalc SWR would most often, and on average, leave a considerable end balance not inconsistent with Ferri’s mention of two times beginning balance (on a nominal basis).

3. If a “typical” retiree died with a $0 balance, that would suggest that approx. one half would have run-out of funds prior to death. (just guessing here, but anyone with a financial advisor is likely among the “survivors”, not the “failures”.)

4. The Consumer Expenditure Survey data on which the decreased spending conclusions are based clearly show that the number of people in the household decreases as the age of the household increases, so it is not surprising that $ expenditures decrease; and

5.  that income decreases as age of household increases ... we should surely expect then that $ expenditures decrease as they are constrained by income

 

[youbet]

I picked up some caveats concerning the "Average Annual Household Spending by Age" numbers.

1.  There's that word again - "Average."  The most dangerous of all the descriptive statistics, it's impossible to understand what's really happening without some feel for dispersion of values around the mean.  My guess (total guess, I admit) is that there is a significant percentage of folks whose spending did not decrease or decreased less than average who would have been quite unhappy planning for spending reductions like these.

2.  Some of the numbers, as others have already mentioned, seem unrealistic in absolute terms.  Pre-Medicare healthcare for a couple at only $3K per year?  That's the cost of your policy plus actual spending for co-pays, deductibles, otc meds, prescriptions, etc.  Possible if you have retiree coverage, but it seems low as an average.  It's very low for our situation.

3.  Is the reduced spending through time being driven by the couple not wanting/needing to spend or because they don't have the money and they're forced to spend less?  Big difference!  For example, does the cost of transportation decline in part because the couple retired with two cars and later, when the oldest car went out of service, they couldn't afford to replace it?  Yet, their desire would be to still have two cars if finances allowed?

I like Audrey's example of travel expenses increasing as you age.  Sure, creaky joints and less strength might cause you to want to do less travel.  But if you could upgrade to first class with cruise staff or tour guides handling everything, that might be another story..........if a planned budget assuming a reduced travel budget wasn't a limiting factor.

Our planned retirement budget does not show significant decreased real spending through time.  And we have two alternate versions accounting for the fact we're self-insuring for ltc:  alternate 1 with one of us in ltc and alternate 2 with both of us in ltc.

I think it was C-T who said that planning for RE calls for balance.  You want to avoid the risk of running out of money and the risk of working too long/living too frugally and saving too much.  Avoid the extremes and I think you'll be OK.

 

[jdw_fire]

3.  Is the reduced spending through time being driven by the couple not wanting/needing to spend or because they don't have the money and they're forced to spend less?  Big difference!  For example, does the cost of transportation decline in part because the couple retired with two cars and later, when the oldest car went out of service, they couldn't afford to replace it?  Yet, their desire would be to still have two cars if finances allowed?

I like Audrey's example of travel expenses increasing as you age.  Sure, creaky joints and less strength might cause you to want to do less travel.  But if you could upgrade to first class with cruise staff or tour guides handling everything, that might be another story..........if a planned budget assuming a reduced travel budget wasn't a limiting factor.

The following is a quote from the paper by Ty Bernicke that is referenced in the May 29 US News & World report article.  Ty Bernicke says income was not a limiting factor.

To analyze whether spending decreases happen voluntarily or out of necessity, it is important to address income and net worth changes for different age groups. Research conducted by Tacchino and Saltzman indicates that those 75 and over spend less than 65- to 74-year-olds, despite maintaining similar levels of income. Ultimately, this information would imply that lower spending happens voluntarily rather than out of necessity.

 

[astromeria]

2. Some of the numbers, as others have already mentioned, seem unrealistic in absolute terms. Pre-Medicare healthcare for a couple at only $3K per year? That's the cost of your policy plus actual spending for co-pays, deductibles, otc meds, prescriptions, etc. Possible if you have retiree coverage, but it seems low as an average. It's very low for our situation.

Our health insurance plus other health care costs are almost $6k now--and my husband is still working. I'm planning on $1500/month ($18,000/year) for health (1/3 for DH, 2/3 for me), and that may be optimistic. I'm way overdue for a physical and would love to have it done (and off the record to boot-) in Thailand, but with my husband's conference in italy, I planned a trip there instead this season. Maybe next winter break--although we're supposed to visit people in Florida, and then in the spring we'll want to visit my daughter who's moving to England, which could leave us thailand in the summer, not a first choice ...getting complicated! I prefer not to do this wihtout DH, in case the findings are more...interesting...than I expect. Those of us with health problems before getting individual health insurance are in a whole different ballgame...rugby, or perhaps lacrosse

 

[d]

Ty Bernicke says income was not a limiting factor.

but that doesn't make it so!  He references Tacchino and Saltzman: “Obviously, these total average figures may distort the true picture since it is also true that average income levels are lower for the older age group.” (admittedly, they then conclude the contrary, but I am again not convinced.)

Is it not true that:
1) the Census data clearly shows income decreasing ?
2) expenditures are clearly capped by income ?

I am not convinced of Bernicke's conclusion.  It might be correct, but I am not convinced that it is ... and should it be incorrect, it would certainly be a dangerous assumption upon which to base one's retirement planning.

If Bernicke's conclusion is correct, would this not then suggest that Americans are on the whole saving too much money for their retirements?  Don't think you'd find many thinking this true.

 

[youbet]

If Bernicke's conclusion is correct, would this not then suggest that Americans are on the whole saving too much money for their retirements?  Don't think you'd find many thinking this true.

My sentiments exactly d.

With this thread discussing Americans oversaving for retirement and another thread discussing boomers needing to work until they are 110 or 120 years old due to lack of retirement savings, it's not easy to come to a conclusion.   

Perhaps history will show that those who oversaved for retirement oversaved for retirement.  And those that undersaved for retirement undersaved for retirement?

 

[audreyh1]

"...since it is also true that average income levels are lower for the older age group.”

That's what I think. The older group spends less because they have lower income.

Audrey

 

[Cut-Throat]

I think what the article is saying is not that all Americans are saving too much for retirement, but those that do save, tend to be on the miser side and save too much. It may even pain them to spend money. - We've all seen people like this!

So - it seems that most Americans don't save anything at all. And those that do save, Save 2 or 3 times more than necessary.

Remember that most all of here run Firecalc with 100% success rates (which is a 'worst case' condition), plan on living way past the Average Lifespan. - And then if the market goes negative one year we'll all probably rachet down our spending - While FireCalc would keep it the same. FireCalc also eats into Principal, and there are a lot of folks here that won't consider touching Principal!- It's no wonder we'll all probably die with a boatload of Moola!