The Truth About Spending in Retirement and Why It’s Good News
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How does actual retiree spending differ from the assumption of inflation-adjusted spending?
how your spending may change in retirement, and why it might mean you could withdraw more in retirement. That's the topic of discussion on this Saturday Personal Finance Edition of the Motley Fool Hidden Gems Investing Podcast. Knowing how much income you'll need in retirement is a key variable in determining how much you need to have saved before you stop working. But retirement isn't just one financial goal, it's a series of annual goals. How much you need in the first year of retirement, then how much you need in the second year, and then the third year, and so on. Here to talk about how spending changes over the course of retirement is David Blanchett, the head of retirement research at Prudential Financial and a portfolio manager at PGM.
David, welcome back to the show. Good to be here. So when it comes to retirement planning, the default assumption is that retirees need their income to go up each and every year with inflation. And we see this assumption in most retirement calculators. I think most financial planners assume that. And even most of the research into retirement, including the old 4% rule. For over a decade, you've been doing research that has questioned this assumption, including in a recent study. So tell us about your latest thinking about how spending changes over the course of a retirement.
Sure, I mean, and to be fair, you know, I still do research where I assume penny rises by inflation.
Why do retirees often reduce spending over time — choice, health, or lack of funds?
So it's a very common assumption. Like I still use this out there a lot, but I think that like one of the most important questions we've got to ask ourselves looking about retirement is like, how do we think, spending is gonna change over time, right? And the most common assumption that we use in research and financial planning tools and all this is that spending is gonna increase every year by inflation. So effectively, what you're gonna spend in the future is the same as what you spend today in today's dollars, right? historically, inflation is averaged about 3% a year. So we would assume that every year you'll spend effectively 3% more. In a piece of research I wrote that was published about a decade ago, and then an updated piece that was just released in the Financial Planner Review, I kind of revisit this topic of, well, how does spending change over time?
And there's pretty convincing evidence that most people as they move through retirement won't increase their spending by the full amount of inflation. So for example, if inflation is 3% a year, you might only spend 1% a year per more. And that kind of comes compounds over time.
How common is underfunding at retirement and does it mean there's a 'retirement crisis'?
So is this due to choice or is it people not having enough money and they realize, oh no, I shouldn't have retired. I need to cut back my spending.
that's one of the most common questions I get asked about this research, both currently and then historically. And I think it's a mix of both, right? But one thing that we can do is look at retirees who have lots and lots of money and see how their spending changes.
Which categories of spending tend to rise in retirement and why is health care a wildcard?
And so even if you just focus on retirees who could spend more, so they're very well-funded, they actually tend to cut back as well. So I think that a lot of this actually just is choices. It's kind of a fun model. People talk about the go-go, the slow-go, and the no-go years. I think that for a lot of people, as they age, they slow down. Part of that is because they have health issues, but part of it is just because we just don't want to do as much the older we get sometimes.
Is there anything else going on here? So, for example, according to the Federal Reserve, about two thirds of the people in the age ranges of 65 to 74 have debt. So is it maybe they're paying off a mortgage or is there anything like, you know, people enter retirement married, but sadly, one spouse passes away and expenses drop? Is there anything specific about that or is it just a general decline in spending?
It's just a general decline.
How likely are catastrophic late-life healthcare or long-term care expenses and how should you plan?
I mean, I've looked at it through a lot of different lenses, through a lot of different kind of cohorts and retirees.
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Chapters
8 chapters
1
How does actual retiree spending differ from the assumption of inflation-adjusted spending?
0:02–1:16
2
Why do retirees often reduce spending over time — choice, health, or lack of funds?
1:16–2:15
3
How common is underfunding at retirement and does it mean there's a 'retirement crisis'?
2:15–2:37
4
Which categories of spending tend to rise in retirement and why is health care a wildcard?
2:37–3:25
5
How likely are catastrophic late-life healthcare or long-term care expenses and how should you plan?
3:25–4:51
6
How should real-life spending patterns change the way you calculate how much you need before retiring?
4:51–5:42
7
How does spending flexibility affect safe withdrawal rates and the classic 4% rule?
5:42–7:15
8
What practical steps can retirees take to cover essential expenses and safely increase initial withdrawals?
7:15–11:47