Spending In Retirement: More Or Less?

The question is easy to ask but incredibly difficult to answer. When faced with the question, it seems that the inner monologue of many aspiring retirees is screaming “We really should know this, but…” Of course, the question is intended to discover what your expenses are now and what they’re likely to be once you’re retired, a key piece of planning information.

“So, how much are your monthly expenses?” 

Because we’re having a lot of discussions with retirees, this topic is top of mind for us. And because the answer is so fundamental to successful retirement planning, it deserves to be revisited.  Of course, every retiree or retired couple will experience different spending patterns. Some retire with the express purpose to begin traveling, and traveling generally costs money. Some retire with the intention of slowing down after a stressful career, and therefore enjoy staying close to home. Some are married, some are single. So while each of us is different, there are some common factors that impact all of our current or future retirements. One of those factors, for example, is how we each perceive and interact with money. 

It’s interesting to hear from people who recognize about themselves that if they have money coming in, they’ll find a way to spend it, all of it. One person we spoke with this week said, “With more time available now, there’s a vacuum. And if there’s a vacuum, I’ll spend more money to fill it.” The response to this self-awareness was to keep his monthly retirement income to a bare minimum and leave the rest of the money invested in retirement accounts until it’s needed. In other words, if you send me more than I need, it’s gone, so keep it out of my hands. That’s an important data point.  Another person wishes to have some extra money coming in every month so she can see the savings account building up during retirement rather than shrinking; that’s an important ingredient to her peace of mind.  Again, really good to know.

The psychology of retirement spending certainly doesn’t dictate the amount one needs in order to retire and stay retired. That amount is a function of fixed costs and the variable costs of a given lifestyle. The psychology, however, does play a huge role is arriving at those costs. At the risk of sounding cliché, you can live on almost zero income in retirement if you live in an old van, forego health insurance, and stay put most of the time eating ramen noodles. All expenses above those basics are really a result of your psychology and beliefs about money. 

When trying to determine expected retirement expenses, and whether they’re going to be higher or lower than what was spent during working years, here are a few thoughts to consider:

• Plan for a similar level of pre-retirement expenses PLUS those activities you’re adding after retirement. Traveling more? Add those costs to what you spent before retiring, minus your 401(k) savings. It’s easier to adjust expenses estimates down later rather than up. 
• Health insurance premiums often represent the biggest variable in expenses due to premium increases of recent years. Saving money in a separate ‘health insurance fund’ before retiring to help offset unexpected premium increases until Medicare begins at age 65 can add a lot of peace of mind when considering a retirement date. 
• Most retirees reduce their spending as they age. The typical retiree will spend more in the initial ‘Go-Go Phase’ while traveling, golfing, and enjoying being active. As interests change and health begins to decline, spending typically declines as well, and eventually most retirees become largely homebound. These dynamics mean spending will be reduced as a natural decline in activity occurs. We generally plan for this by reducing the projected expenses inflation rate a bit, even though a small percentage of retirees will find themselves in costly nursing care at the end of life. 
• It’s okay to make adjustments to spending and commensurate withdrawal rates during retirement because of these stated factors. Life changes and plans can be adjusted in most cases.

While I can’t definitively answer the question of how much the average person should plan for in retirement expenses, we can agree that thorough discussions can result in a lot of shed light on the subject. Each person is different, each couple has different needs, and each phase of retirement has different realities. The key is to begin with a well thought-out plan, set aside some level of financial margin, and agree to update the plan as the years pass. This way, you can live a dynamic and exciting life while knowing there’s a dynamic plan in place to support you.