Declining COL in retirement?...

[Cb]

"Executive Summary:

Traditional retirement planning assumes that a household's expenditures will increase a certain amount each year throughout retirement. Yet data from the U.S. Bureau of Labor's Consumer Expenditure Survey show that household expenditures actually decline as retirees age. Consequently, under traditional retirement planning, consumers tend to oversave for retirement, underspend in their early years of retirement, or postpone retirement.

"Reality" retirement planning assumes that a household's real spending will decrease incrementally throughout retirement. The result is that clients can make more realistic retirement saving assumptions and will be able to retire sooner.

The paper analyzes the Consumer Expenditure Survey data to determine whether people are spending less voluntarily as they age or out of financial necessity or generational differences. The conclusion is that reduced spending is voluntary.

Using Monte Carlo simulation, the paper runs hypothetical retirement income projections comparing traditional retirement planning and reality retirement planning. Under the traditional approach, the couple's nest egg would appear to be depleted by age 80. Under the reality approach, the nest egg at age 80 would be over $2 million.

Such dramatic differences not only have implications for retirement planning, but for related issues such as estate, tax, and investment planning."

http://www.fpanet.org/journal/articles/2005_Issues/jfp0605-art7.cfm

I generally agree with this piece, but my planning assumes that reduced expenditures on waverunners, motorcycles, and scuba charters will be offsett 1:1 by increased health care / insurance costs.

If I'm way off on that ratio, I'll either find a means to dispense of the excess, or might buy a Suzuki GSXR-1100 or take up cave diving when I'm 87, depending on the nature of my error.

Cb 

 

[Spanky]

..."Reality" retirement planning assumes that a household's real spending will decrease incrementally throughout retirement. The result is that clients can make more realistic retirement saving assumptions and will be able to retire sooner.

I do not ascribe to the premise that expenditure will decline during the retirement age.

 

[Helen]

I am planning on doing a lot of traveling the first six years of retirement, so I will spend more during those years. I am going to ladder the six years of spending money in CDs and have the tax sheltered money in the market.

For the next eight years I'll continue to fund the after tax account to accumulate the first six years of living expenses. I am going to forgo the after age 50 401k catch up contributions to fund this after tax account. I'll put the catchup contribtution into the Roth though.

-helen

 

[cute fuzzy bunny]

My cost of living sure did decline after I retired. From burning through about 750k in a year to about 35k. I dont have the hard #'s as I dont do that anal quicken thing (sorry nords but I'm pretty sure its dropped a few thousand a year up to today. Dont think I want to drop it further though.

 

[riskadverse]

I'm glad someone is starting to look at traditional retirement planning.  When I started to ask the question - Do I have enough to retire?, every calculator on the internet said no.  I then experimented and put in 2 million dollars of assets - will it last? - no.  3 million dollars of assets - will it last? - no.  Another flaw was they based my expenditures on my income.   I guess the assumption is people spend the maximum their income will provide.  So for me to retire I needed an income of 75% of what I was earning at the time- and a caviet that that might not be enough.   No where did it ask what portion of my income was saved.   I started to understand that these retirement calculators were marketing tools for investment firms and financial planners to make you feel insecure and turn your money over to them.
 
For the first time in our lives, my wife and I calculated our budget.  Never had to before, we always lived well below our means.  Using our own "calculator" we figured it was doable.   I'm hoping that making the decision is much like buying your first house.  You fret and worry about if it is the right decision at the time, but a couple of years later, it's obvious. . .and you probably should have done it even sooner.  

 

[cute fuzzy bunny]

I started to understand that these retirement calculators were marketing tools for investment firms and financial planners to make you feel insecure and turn your money over to them.

Ding ding ding...we have a winner!

 

[windsurf]

  From burning through about 750k in a year to about 35k. 

Is that a record for this list??

 

[sgeeeee]

Is that a record for this list??

Yes. But let him tell the story two or three more times and it will get bigger.

 

[sgeeeee]

Interesting article. Thanks for the link, Cb.

I've always felt like the most uncertain portion of my retirement planning was estimating my future budgets. While I knew what I was spending before retirement, it wasn't clear to me that I really knew how I was going to want to live during retirement -- especially several years into retirement. I considered all kinds of spending models and budgets.

My confidence that I could afford to retire was based primarily on a model that assumed my spending in retirement would initially go up about 10% and then increase at the inflation rate. The 10% increase was based on the development of a detailed budget including increases to my existing travel, vacation and leisure activities, reductions to my existing budget for areas like clothing, as well as flat (inflation increases only) assumptions for utilities, etc.

Interestingly, my overall spending in my first year in retirement fell very close to my overall forecast budget -- though agreement was not so good item for item. This actually worried me a little since I tend to be conservative and design in margin. The second year came in significantly lower than the original plan. This happened because we became more focused on value. We became better shoppers and we re-thought our values. We've managed to do more of what we enjoy for less money. But who knows how it will go from here?

I think looking at various kinds of spending models is useful, but I wouldn't want to bet my retirement on the model they came up with in this article. Reduced spending by age may describe the typical American, but I'm not that typical. Sometimes when I bring up the idea of going on a more tame (but more expensive) trip, my wife will say, "We can save that for when we're old pharts." She's serious. She figures we'll still want to travel 10 or 15 years from now but we won't be able to backpack and camp for weeks at a time. So we can spend our money traveling to those tame places then.

 

[ESRBob]

Seems to me the reductions in spending in retirement might only really start to kick in when you get into your 80s or so, shun all forms of entertainment, travel and so forth. Life gets pretty simple then, except fot healthcare and nursing etc.

But I wouldn't start modeling any declines in actual real dollars spent in the later years. Keep spending in your models stable, and use it as a buffer against the inevitable miscalculations or market screwups, a rising overall standards of living, excesses of actual inflation over the CPI I am trying to organize my models to keep abreast of, or rising healthcare costs, any one of which could alone eat up any slack my budget might be affording me decades down the road. I don't think this is overly prudent or conservative. ER lasts a long time, and I don't want to take away too many of the little pockets of slack that are tucked away here and there in the SWR modelling. Maybe when you get to be 60 or 70 you can see how things are turning out and dig deeper into the cash pile.

Agree that the calculators that base everything around percents of income as opposed to current and projected spending are hopelessly flawed.

 

[Mr._johngalt]

Interesting article.  Thanks for the link, Cb.

I've always felt like the most uncertain portion of my retirement planning was estimating my future budgets.  While I knew what I was spending before retirement, it wasn't clear to me that I really knew how I was going to want to live during retirement -- especially several years into retirement.  I considered all kinds of spending models and budgets. 

My confidence that I could afford to retire was based primarily on a model that assumed my spending in retirement would initially go up about 10% and then increase at the inflation rate.  The 10% increase was based on the development of a detailed budget including increases to my existing travel, vacation and leisure activities, reductions to my existing budget for areas like clothing, as well as flat (inflation increases only) assumptions for utilities, etc. 

Interestingly, my overall spending in my first year in retirement fell very close to my overall forecast budget -- though agreement was not so good item for item.  This actually worried me a little since I tend to be conservative and design in margin.  The second year came in significantly lower than the original plan.  This happened because we became more focused on value.  We became better shoppers and we re-thought our values.   We've managed to do more of what we enjoy for less money.    But who knows how it will go from here?

I think looking at various kinds of spending models is useful, but I wouldn't want to bet my retirement on the model they came up with in this article.  Reduced spending by age may describe the typical American, but I'm not that typical.  Sometimes when I bring up the idea of going on a more tame (but more expensive) trip, my wife will say, "We can save that for when we're old pharts."  She's serious.  She figures we'll still want to travel 10 or 15 years from now but we won't be able to backpack and camp for weeks at a time.  So we can spend our money traveling to those tame places then.   

Briefly, we (no make that I)    plan to continue at roughly the combined gross income we have at present, which is roughly 25% of my gross pre-ER income. We assume spending will decrease even more in the sense we will still spend it all
but get less due to inflation.  Back up is two (2) paid up homes and our ability
to cut back even further with a little budget tweaking.  Oh sure, there are a few
disasters which could screw this up, but I've been working this plan a long time now and I like it, based on our budgetary restraints.  Summary:  Dropped
gross income to 25% of pre retirement full time income, steady as she goes at that level and prepared to drop even further should the need arise.  As I have posted many times, the 25% was easy.

JG

 

[Martha]

I'm glad someone is starting to look at traditional retirement planning. When I started to ask the question - Do I have enough to retire?, every calculator on the internet said no. I then experimented and put in 2 million dollars of assets - will it last? - no. 3 million dollars of assets - will it last? - no. Another flaw was they based my expenditures on my income. I guess the assumption is people spend the maximum their income will provide. So for me to retire I needed an income of 75% of what I was earning at the time- and a caviet that that might not be enough. No where did it ask what portion of my income was saved. I started to understand that these retirement calculators were marketing tools for investment firms and financial planners to make you feel insecure and turn your money over to them.

I have seen calculators that won't let you put in less that 75% of your current income. I tried lying to the calculator about the income side and had much better results.

 

[unclemick]

When I play with calculators - I too cheat - put in my meager pension as my income - almost always the results say I've saved too much.

They(the calculators) be imprisioned by the math from which they are constructed.

The number 2 pencil and engineering graph paper is way underrated.

 

[Spanky]

My cost of living sure did decline after I retired. From burning through about 750k in a year to about 35k. I dont have the hard #'s as I dont do that anal quicken thing (sorry nords but I'm pretty sure its dropped a few thousand a year up to today. Dont think I want to drop it further though.

Wow, that's over 95% reduction. The adjustment must have been significant.

 

[laurence]

Yep, stopped filling the swimming pool with Dom, for one.

 

[cute fuzzy bunny]

Wow, that's over 95% reduction. The adjustment must have been significant.

Honestly, it was a happy adjustment.

Big chunks of that were paying people to do everything for me, eating and drinking out all the time, and buying everything that caught my eye. Oh yes, and a few very very expensive girlfriends.

I had a maid and gardener come by twice a week, had someone come by 2-4 times a week to feed the pets when I was on the road, take in my mail, put out the trash, water the indoor plants and hang out a couple of hours to make the place look lived in.

Gal I was dating just before meeting my far, far superior wife (in every way) liked $100 bottles of wine. Sometimes two in a row. At least once or twice a week we'd go out for cocktails and eats and roll up a $300-400 total bill for the evening. We worked together, so we went out for lunch every day and out for dinner after work. I cooked maybe once a week.

That year I bought 3 cars for cash, about $20k in clothes and shoes for her, about $7k for me. We went on a $30k two week vacation (which doesnt include what we paid out of pocket for food, drink and crap we bought while we were there).

I made 9 trips of a couple of days from CA to MA to visit friends and family at about $3k a pop. Paid for first class upgrades out of my own pocket for business flights I took 2-4 times a week.

It adds up amazingly quick.

At this point I havent flown since early 2001, havent paid more than $10 for a pair of pants or $5 for a shirt, cook and eat most of my meals at home, and do everything myself. Half of the wine I drink comes out of a box. I have far fewer hassles and headaches. Nobody is impressed with my 'lifestyle'. Good trade.

SG - if it got any bigger, I couldnt use it...

 

[Nords]

I do not ascribe to the premise that expenditure will decline during the retirement age.

I agree, but I wonder what happens when you're still alive as your declining expenses continue their straight-line path through zero.

Does that mean your kids are paying all your expenses out of their grateful appreciation for bringing them into this world? No doubt that makes the sleep deprivation seem so worthwhile.

 

[HFWR]

Deloise?

 

[Cb]

Rick Ferri posted the following response in a thread related to the paper on the Vanguards Diehard forum:

"We have an economics research intern working for us this summer. He is doing a similar study on inflation using U.S. Bureau of Labor's Consumer Expenditure Survey. The study tracks how different age groups are effected by different components of the CPI based on their spending habits.

Preliminary data shows that young people in their early 20s who are living on their own and paying their own college costs have the highest CPI of any age group. Retired persons who have adequate medical coverage and own their own homes have the lowest CPI.

Another part of the report will be a personal CPI calculator in MSFT Excel format where you can calculate your own personal CPI. We hope to have the report out by mid-July, but I don't rush the poor boy. It might cause work related stress on top of his high cost of living.

Rick Ferri"

I hope the final report breaks out an estimate of CPI for retirees footing the bill for their health coverage.

Cb

 

[sgeeeee]

. . .

SG - if it got any bigger, I couldnt use it...

Reminds me of something that happened to me. I was documenting some prehistoric petroglyphs on the side of a Mountain near Tucson when the largest rattlesnake I ever saw started toward me. It was not timid and actually chased me. (the original story was much longer and more interesting)

I told the story to people about 5 or 10 times, but each time, the snake got bigger. Eventually I had to stop telling the story because the snake got bigger than the mountain.

 

[cute fuzzy bunny]

Re: rick ferri.  Not sure who he is.  I had a couple of good interns who produced research work for me.  Surprisingly it always turned out to say exactly what I wanted it to say.

Re: snakes.  Gee Mike, wish I knew we were talking about snakes.

Wanna see my 1040's and my american express bills from that year?

 

[sgeeeee]

. . . wish I knew we were talking about snakes.

Wanna see my 1040's and my american express bills from that year?

Wanna see my snake?

 

[Spanky]

TH,

Thanks for the inspiring story for those still cling on to a life style of extravagance. You have demonstrated that you can have a happy life without the extravagance.

Spanky

 

[Spanky]

Does that mean your kids are paying all your expenses out of their grateful appreciation for bringing them into this world? No doubt that makes the sleep deprivation seem so worthwhile.

Nords,

I have no expectation that my kids will follow the Asian tradition of taking care of the elders (or aging parents). It is one of those things that I must accept as societal value changes. My plan is to ensure that we save enough for the future so that you do not have to rely on the kids or the government financially. I do hope that they will visit us periodically.

Spanky

 

[Spanky]

Re: rick ferri. Not sure who he is.

Rick Ferri is a CFA. He is also an author of personal finance books.

I had a couple of good interns who produced research work for me. Surprisingly it always turned out to say exactly what I wanted it to say.

Consultants hired by corporate CEOs produce compensation report for executives do the same thing.

Spanky