My brother sent me a link to an article on retirement spending the other day with the comment, “I am sure you will not agree.” The gist of the article was that household spending peaks between ages 45–54 and then falls throughout the rest of our life (after kids have left, home is paid off, etc.). The implication here is that you might be able to save less for retirement than what many financial advisors may suggest. I called my brother back to let him know that I agreed with the article, which of course threw him for a loop since brothers are not supposed to agree. But I also shared a different viewpoint that we see with clients―a frontline perspective.
There are several angles I want to share, in no particular order:
- Retirement spending proper. The reality is that people do not spend a flat amount, inflated each year, for 30 to 40 years of retirement. Typically, I see people spending more in the first two or three years of retirement, as they get their sea legs; at this stage, retirees may travel, fix up their home, or do fun things related to hobbies. Then spending plateaus or drops slightly (but not much) for the next 10 years. Usually around 75 or 80 spending starts dropping again as age simply slows people down. Healthcare spending might increase, but a lot of other things decrease, as much as 10–30%.
- Americans are minimalists. Financial advisors made a mistake decades ago by treating the saving side of the retirement equation as the most important. From that perspective, most people I know take the minimalist approach and focus on what is the absolute lowest amount they need to save to get them to their goal. The problem with this approach is that it leaves little flexibility in life (see point three). To me, the better question is, “How much do you choose to spend?” This is more of an abundance approach, but I have never met a retiree with too much money to spend. Aim high so you save enough to spend less. Channeling Dave Ramsey, live like no one else so you can live like no one else.
- Life happens. Part of the problem with the minimalist approach is that life is not a smooth ride. Our income has ups and downs, as does our spending. When our income is up, we should make hay and save more. Doing this allows us to save less when spending rises (for example, when paying for children’s college or having some cash after a layoff). I encourage you to consider over-saving when it is possible so that you can under-save when you must. Just like people do not spend a flat amount throughout retirement, it is unrealistic to save or spend a flat amount while working.
Choosing our lifestyle is the point in all this. We get to choose our retirement lifestyle, as well as today’s lifestyle. This is a very personal question since each of us will have different priorities. Some will choose to spend more today on their children’s education, a home, or vacation experiences, while others will choose to prepare more for a rainy day (though I prefer to think of retirement as a sunny day). As I pointed out to my brother, saving and spending are choices. Choose long-term flexibility by controlling what you can control.
About Jon T. Meyer, CFP®
Jon T. Meyer, CFP® is the President of Boeckermann, Grafstrom & Mayer Wealth Management, LLC, a Minneapolis-based Registered Investment Advisory firm. Jon specializes in working with retirees and individuals nearing retirement to help them create the income they need in retirement by utilizing advanced social security planning, tax planning and investment strategies. For more information visit www.bgmwealth.com.