Another look at retirement math

[BigNick]

That's all well and good, and I like stats and data as much (more than?) the next guy, but I just don't feel comfortable with averages for something like this (applied to an individual).

But you're already applying an average - the one you prefer, saying that spending goes up with the CPI or some other index, or CPI + 2% or whatever. That's also based on historical data. The argument is whether you can do better. If you know that you plan to go round the world every year until you're 90, more power to you. If you think, well, maybe after 75 I'll settle down and babysit the great-grandkids, then Bernicke's research shows that you aren't alone.

The FIRECALC 4% SWR isn't based on averages - it tells you what the worst periods would have done to you. While we can't predict the worst that will happen to us spending-wise, I just can't feel comfortable planning on a reduction in spending, even if that is the norm.

I don't see the incompatibility. FireCalc allows you to include the idea of reduced spending - the two things (the historical model of FireCalc which tells you how robust your portfolio is, and the way in which spending varies over time) exist in different spaces.

There are so many unknowns ahead of us, if this just turns out to be a cushion, so be it.

Agreed. But we're also talking about retiring *early*. I'd hate to find myself with a huge cushion at 80 having retiured "early" at 58, and not done what I wanted to between 52 and 58, even though I could have. Otherwise, it'll be "just one more year" every year until they push you out the door.

 

[ERD50]

But you're already applying an average - the one you prefer, saying that spending goes up with the CPI or some other index, or CPI + 2% or whatever.

I do agree with you - though FIRECALC is looking at the worst periods, spending models are based on that historical CPI for those periods, and my spending could be different, and/or the future could be different.

I guess what I'm saying is, I don't want to throw another 'average' factor on top of that.

Agreed. But we're also talking about retiring *early*. I'd hate to find myself with a huge cushion at 80 having retired "early" at 58, and not done what I wanted to between 52 and 58, even though I could have.

True, but my spending plan has allowed for doing what I want (I don't have a lot of expensive 'wants', I'm pretty happy with simple things), and I'm doing them. After that, it won't bother me at all to be 80 with a big cash cushion - that is preferable to me to having to make big cuts at that age, or possibly be looking to my kids to help out (I sure don't want to do that after ER).

Maybe part of what drives my thinking is (as I said) I'm pretty happy with simple things. My 'live well' budget and my 'live cautiously' budget are not that different. If I felt I needed a $30,000 annual discretionary travel budget or other expensive things that I'd give up later, then yes, it would be easier to envision a cut in spending at 75 or so. But for me, it's easier to see extra expenses piling on at 75, then it is to see cuts. So this is going to vary from person to person.

BTW, I know you are fairly new around the forum, just wanted to say 'Welcome', and that I've enjoyed reading your posts. It's nice to get some European (as well as other countries) perspective here. I hope you continue to participate.

-ERD50

 

[youbet]

. I'd hate to find myself with a huge cushion at 80 having retiured "early" at 58, and not done what I wanted to between 52 and 58, even though I could have.

Actually, the projections say that the vast majority of us will croak with either a cushion still in place or having run out of money. Hardly a soul will die having just spent their last penny. So, you calibrate your plan, make adjustments along the way and see what the variables of inflation, investment returns, taxes and unknown budget requirements do. Chances are extremely high you'll wind up having too much or too little with only a tiny chance you'll "nail it."

 

[youbet]

If I felt I needed a $30,000 annual discretionary travel budget or other expensive things that I'd give up later, then yes, it would be easier to envision a cut in spending at 75 or so.

I feel the same way. If DW and I had a pent up demand for some expensive activity (travel, sophisticated entertainment, etc.) that we wanted to fill for the next decade or so and then stop, I'd feel comfortable projecting a decline in spendling later. But we don't. We like camping, kayaking/canoeing, hunting, fishing and those sorts of things. We're likely to be spending more later as we require guides, outfitters or other help to continue participating.

I do understand people feeling that planning on continued level real spending in the future means less spending now. And if there were some things I really craved today that I could do by cutting back tomorrow's budget, I'd consider it.

 

[LARS]

Chances are extremely high you'll wind up having too much or too little with only a tiny chance you'll "nail it."

But ZERO chance you won't get "nailed"!

 

[BigNick]

Maybe part of what drives my thinking is (as I said) I'm pretty happy with simple things. My 'live well' budget and my 'live cautiously' budget are not that different. If I felt I needed a $30,000 annual discretionary travel budget or other expensive things that I'd give up later, then yes, it would be easier to envision a cut in spending at 75 or so. But for me, it's easier to see extra expenses piling on at 75, then it is to see cuts. So this is going to vary from person to person.

That's an excellent analysis - I now see which "extra average" you were thinking about. Bernicke's full paper partly addresses these concerns, in that he shows that the decline in spending is more or less constant regardless of income, which one could take to mean that it's constant regardless of spending patterns. But it would have been nice if he had been able to establish, within the more common income groups, whether, for example, people who consider that they live simply on, say, $50K/year, reduce their spending by less than people who think that they are living adventurously on the same amount. Since his primary data comes from other people, we can't know that. (Add me to the list of people who would like a couple more input fields in FireCalc's feature which uses this model. I know that I'm not going to reduce my spending at age 56, and even if I lie about my current age, it forces me to stop reducing my spending after 20 years. I'm hoping to do the opposite: spend constantly until about 70 and then reduce until I'm sitting drunk and shouting at the TV by 80. )

BTW, I know you are fairly new around the forum, just wanted to say 'Welcome', and that I've enjoyed reading your posts. It's nice to get some European (as well as other countries) perspective here. I hope you continue to participate.

Thanks!

 

[rescueme]

Our biggest spending category is travel and has been for many years. Currently in our early 60's, I modeled a reduction by decade (age 70,80,90) assuming that we won't be globetrotting but we will be substituting shorter trips, bus rather than air, local rather than international, etc.

All other expenses I've kept at 100% of pre-retirement (I'm retired; DW may soon be).

While “Mentsch tracht, Gott lacht” (Man plans, God laughs), we know that our expenses will rise either by getting more help while living in our current home, or moving into a retirement community in the future. However, we're not "over budgeting" those items at this time. Our thinking is that the reduction in future travel expenses will be going toward the gardener, handyman, driver (for local shopping trips), etc.

Anyway, that's my thoughts...

 

[MichaelB]

I would imagine that household spending would decline as couples become sole survivors. Household spending would also decline as individuals move into medicaid-paid nursing homes. These things could explain part of the decline reported in the data. It would be very interesting to see spending as it relates to affordability.

Age based spending should (would) shift from goods to services. People in better health might find themselves spending more for “affluent services” such as eating out, travel, more domestic help and tailored, specialized health care. People in poorer health may suffer increasing expenses on health care and personal care assistance. I see no clear trend to unforced age-based budget reductions. In addition, large parts of health care expenses are not smooth but sudden and hefty and may motivate some to reduce other voluntary spending to build up emergency funds.

The opportunity I see to reduce spending later in life depends on having very god health and mobility, and not consuming more services as one consumes fewer goods. This is possible but I do not plan for it.

An additional problems as I see it is the shift from goods to services means a move from a lower inflation (goods based) to a higher inflation (labor based) lifestyle at a time when portfolio management skills may be declining and there is a greater desire to reduce investment risk

This is a dilemma, made all the worse by the difficulty in assessing one’s own longevity risk.

 

[ziggy29]

I would imagine that household spending would decline as couples become sole survivors.

Likely true, but when this happened to my mom (dad passed away in 2005), it also:

* Changed her filing status from MFJ to single
* Caused the loss of 2 exemptions
* Increased her tax bracket from 15% to 25% despite
* Losing one of two SS checks (hers, the smaller of the two)
* Having 85% of her SS income taxed instead of 50%

Her income dropped by about $9,000 from 2005 to 2006 but her taxes were more than doubled -- about $4,000 higher. I don't think that "double whammy" reduced her expenses by a combined $13,000.

It's very important to remember that the taxman will be coming for you in earnest starting with the first full calendar year you live as a widow(er).

 

[LARS]

It's very important to remember that the taxman will be coming for you in earnest starting with the first full calendar year you live as a widow(er).

Was there something unique to your parents situation? Or is it the difference of joint vs. single tax returns? Or is there some IRS sword hanging out there that I'm not aware of?

 

[Stevewc]

Likely true, but when this happened to my mom (dad passed away in 2005), it also:

* Changed her filing status from MFJ to single
* Caused the loss of 2 exemptions
* Increased her tax bracket from 15% to 25% despite
* Losing one of two SS checks (hers, the smaller of the two)
* Having 85% of her SS income taxed instead of 50%

Her income dropped by about $9,000 from 2005 to 2006 but her taxes were more than doubled -- about $4,000 higher. I don't think that "double whammy" reduced her expenses by a combined $13,000.

It's very important to remember that the taxman will be coming for you in earnest starting with the first full calendar year you live as a widow(er).

Ziggy my man you have hit on something I've never considered.
Do you see any way to avoid, prepare or lessen this situation now that you are up close and personally experiencing this in your life?
Any, we should have done X thoughts?
Thanks for sharing,
Steve

 

[FIREd]

It's very important to remember that the taxman will be coming for you in earnest starting with the first full calendar year you live as a widow(er).

Exactly. I have experienced something similar with MIL, though she was a divorcee and not a widow. Her household income was cut by 3, but the tax bill wasn't.

 

[MichaelB]

My mother came over last night for an evening at the Chicago Botanic Gardens and then dinner. We talked about this over some beers. (She worked as a public health nurse providing in-home medical services, mostly for seniors). Her first comment was: “I would travel more if I had a regular traveling companion”.

She then went on to make a couple of observations.

- People in their 70’s and 80’s are more concentrated versions of what they were in their 30’s and 40’s. Spenders do not become savers and savers do not become spenders.

- As you age, buying stuff becomes less important and spending on personal services increases.

- Her taxes have gone up just like Ziggy’s mother and for the same reasons.

- So many seniors have so little money it’s hard to spend less, and there are lots of incomes that are not inflation indexed.

Her conclusions: any analysis has to begin with how much money the people have available to spend. People voluntarily change their spending habits because of poor health, declining mobility or loss of companionship. They don’t reduce their spending because they are concerned about running out of money, but they do reduce their spending after they run out.

Reflecting on Nord’s original post,

I've always been skeptical that retirees will have the personal discipline to reduce their spending later in ER. But the fact that there's broad-based statistical evidence of the occurrence of reduced spending leads me to believe that discipline isn't necessary. In fact, the lack of overall discipline may be leading to that reduced spending.

There seems to be an element of self-fulfilling behaviour here. Thrifty people and those focused on portfolio survival don’t choose to reduce spending late in life because they adapted much earlier. Involuntary spending reductions are people running out of money because they always spent too much.

Personally I don't see spouse and me ramping up today's spending. Heck, for one reason or another our spending has already been dropping ever since we ER'd. However this later-in-life spending data can support a useful discussion of whether we still care to continue hedging longevity risk with equity risk.

Based on the above, you won’t stop hedging longevity risk because it’s part rational choice and part your basic nature. You also are not likely to run out of money if should be so fortunate to live many more decades because you are dealing with this now. The fact that you and spouse are both financially capable is a big additional asset..

 

[rescueme]

Her first comment was: “I would travel more if I had a regular traveling companion”.

Not to take this off topic, but I did have a chuckle when I read the above statement.

My DW's passion is travel (not me ) and I've stated before it is our largest annual expense.

I hate to travel, since I did so much of it for my j*b, before I retired.

During the times we were on group tours or a ship, we would meet a lot of women who traveled together because their husband/SO would not, for various reasons.

I've been telling my DW (for well over a decade) that she needed to find somebody else to travel with (none of her family/friends have any interest to go with her).

Last year, on our trip down under, she met another woman who she went out on some side trips while I stayed (happily) at the hotel while they did their thing.

They hit it off, and will be traveling twice this year in the fall; both in the U.S. and one international trip.

BTW, don't think I'm not doing my part; we spent time in London, along with a Baltic cruise last month, so I did get to do "my part", but still get to cut my travel by 2/3's this year.

I'm keeping my fingers crossed for them; with a little luck, my travel days may be over...