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EP 70 - Spending in Retirement

In episode 70 of the Equity Compensation Guidebook, we're going to talk about spending in retirement. Yes, I'm deviating from equity compensation but please stick with me as this is important. Spending in retirement is a huge question everyone wants to know the answer to. Actually, this question can take a variety of forms. Will I have enough to make it through retirement? How much can I spend in retirement? What's my target nest egg so I can actually retire? A few factors include inflation, healthcare expenses, social security, and longevity. Oh, and we certainly can't forget assumptions about what the market may do. 

What I want to focus on is what studies show us about spending trends in retirement as this is the most important factor to me. Spending. If you know me, you've heard me focus on your spending number. If you have a good estimate of how much you spend, we can start calculating the rest to answer the question of how much you can spend in retirement. 

You will want to hear this episode if you are interested in...

  • The reverse bell curve of retirement spending [1:45]
  • Study findings for consumption and spending in retirement [4:10]
  • Know your spending [7:19]
  • This week’s FLASHBACK [8:45] 

Smile! It’s what spending looks like

I fall into the camp of knowing your spending number above all else. I was reminded of this concept recently as I came across a bunch of articles on spending trends in retirement. The findings reminded me of the only thing I remember from the only psychology class I ever took. The professor used it to tell us how our parents were probably happier now that we were off at college. The curve was based on happiness levels for couples and was highest when they first married and again when the kids turned 18. When she put it on the screen it was an obvious reverse bell curve, basically a big smile, which is what retirement spending looks like. 

If you've talked to me at any length you may have heard me mention how spending trends in retirement typically go like this...

They stay the same or slightly increase initially at retirement because you do things like pay off big bills, do a big project or two around the house, or finally take some big trips you’ve dreamed of. These usually offset things like higher taxes related to the income coming in, or even the amount that you were putting away in your 401Ks.

After some time in retirement, this spending number starts dropping. No more big projects or bills, and maybe you've either done all the big trips you wanted or you just can't travel like you used to. Unfortunately, as you get older, spending goes back up due to healthcare costs. If you were to graph this it would look like that good old reverse bell curve or a smile.

The studies show…

The first finding shows expenditures on food expenses drop anywhere from 4-8% in retirement. This study was from about 15 years ago so the data is not in a high inflation environment like we are now, but it's reflective of a more normal inflationary situation. 

Next point, food consumption is actually a narrow part of spending in retirement so it's important to look at overall consumption spending. The trend here is similar to what I mentioned before. Overall consumption stays steady initially in retirement and then begins to decline. The high-level summary of this study is spending declines about 1% annually through retirement. 

Another study showed that for every five years in retirement spending declined 15%. And there was an inflation-adjusted study that showed spending decreases roughly 1% annually the first decade of retirement, 2% a year the next decade, and then another 1% decrease annually the final decade. Adjusting for inflation spending was almost normal but still lower than inflation. Unfortunately, the bad part of this is the study had a rather limited sample size. 

Check out the episode for some of the other findings and shoot me a message if you’d like to look at the original sources.

This week’s FLASHBACK: The COVID collection

If you've listened to me you know I enjoy music. I paused a live Jason Isbell CD to record this podcast. Since COVID began, I've been building up my music library. It started with a new record play there. Then it was lots and lots of records to build a record collection. Then my in-laws were nice enough to pass along a 200 CD player to me. That was awesome! So I put aside building the record collection and focused on increasing my CD library. 

I still listen to streaming music, but there's definitely a difference in the sound quality coming from a CD player hooked to decent speakers versus Spotify playing from my phone or my laptop. Plus I like the music playing while I work so everything's set up in my office. Every couple of weeks I wander into one of the local shops that carry used CDs. I like wandering around the shops to see artists and CDs I either forgot about or didn't know of. It isn't as good as going CD shopping when we were teens because the CDs are locked behind glass, but it works. 

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.