The ‘Retirement Spending Myth’ Debunked

Years ago, I took issue with the widespread belief that people could assume they would spend less in retirement than during their working years.

Research continues to support my view.

The foundation of retirement planning was that once retired, a person would spend 80% or less of pre-retirement income because certain expenditures would be eliminated, including payroll taxes, 401(k) contributions, commuting, clothes for work and more.

A problem with that theory was that retired people have to fill the time they used to spend working.

Also, many people enter retirement with a list of planned activities and experiences.

Often, these things cost money. Traditional retirement advice seemed to assume people would spend retirement primarily in no-cost activities such as watching television and would eat all their meals at home.

The latest research from J.P. Morgan Asset Management found that even if the traditional retirement spending assumption once was true, it no longer is.

The firm studied actual behavior over about a decade of retirees who made about $70,000 before retirement.

It found the 80% assumption was largely accurate for this group some time ago, but retiree spending steadily increased.

In 2019, the retirees were spending about 92% of their pre-retirement income.

Other research over the years showed that the level of spending by retirees varies with the level of pre-retirement income.

The higher pre-retirement income was, the higher the spending in retirement will be.

Those making $100,000 or more before retirement were likely to spend the same amount or more in retirement as before.

Another oversight in traditional retirement advice is that spending isn’t steady in retirement.

The U.S. Department of Labor regularly studies spending by different age groups.

Those studies consistently show spending doesn’t decline much in the early years of retirement, when retirees are younger, healthier, and have lists of planned activities and experiences.

The data also show that as people age, spending declines, even after adjusting for inflation.

The composition of retirement spending also changes.