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Estimating Retirement Spending

Last update on: Feb 02 2017

The estimate of retirement spending is the linchpin of most retirement plans. You have to determine the cost of the lifestyle you want and use that to assess how much money you need from then nest egg each year. If your nest egg can’t sustain that level of spending, you need to modify the expected lifestyle. Others like to take a different approach. They look at how retires spend their money. If that’s the route you want to take, look at this link. It’s a comprehensive look (read “long”) at surveys done of spending by U.S. retirees.

These surveys are important, because as I’ve argued, most people don’t spend money through retirement the way it is estimated in most plans. There isn’t a steady level of spending that’s increased by the inflation rate each year. Read these surveys to see how people really spend money. I think the bottom line is that most people think they need more money than they really do.

Retirement spending trends observed for the average U.S. retiree include the following:

  • Spending drops modestly (14%) immediately after retirement, partly due to the cessation of work-related expenses (e.g. special clothing and transportation) and changes in food expenditures.
  • Inflation-adjusted spending continues dropping slowly afterwards as retirees age into their late 70’s.
  • Housing + Related is by far the largest spending category for all age groups.
  • Health Care expenses rise with age, but remain substantially lower than housing expenses.
  • Increases in health care spending are not sufficient to change the downward trend in total inflation-adjusted spending, at least not until late in retirement.

Studies of retirement spending patterns across racial and income level subgroups reveal measurable heterogeneity in U.S. retirement spending.



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