November 9, 2014

Does Spending Change After Retirement?

The short answer is, "Yes." But, a more important question is, "Does spending drop after retirement?" That answer is not quite so simple. I would suggest that spending can drop after retirement, and for most folks it does. But, more to the point, spending shifts. It changes from your working days. It also changes depending on what stage of retirement you are in.


During the first period of retirement (maybe lasting 10 years or so), it is quite possible that your overall expenditures may increase. Why? If you are like many retirees you suddenly allow yourself to travel to see family, jet off to Europe or New Zealand, or take a Caribbean cruise. If you are not moving right after you leave the work world, it is not uncommon to sink money into your home, to make it an oasis and more comfortable. You may decide to eat away from home more often, replace an aging car, get an RV (!), or make other discretionary purchases.


During the second phase, you will probably have gotten a lot of the travel bug out of your system and find health concerns and expenses beginning their inevitable rise. Your spending with shift more toward needs and less toward wants.


Finally, your third phase will probably consist of personal maintenance type expenses. Depending on the arrangements you have made, your expenses will shift again, with most discretionary costs gone from your budget.

The national average for retired households shows a 20% drop in spending, though because that is an average, there were many who showed an increase. Betty and I had a more substantial decline in expenses- closer to 40%. Importantly, the average expenses also showed a decline to match the income drop. For those between 65 and 75 the reduction was 19%. For those  who make it into their 90s, the spending drop was 52%.

So, where do the shifts occur?

- Work-related expenses, including gas, work clothing, and meals

- Housing expenses. Mortgages begin to be paid off, downsizing might mean lower taxes and maintenance costs.

- Health care will take an increasingly larger share of your budget as you age.

- Entertainment. As we age we are less likely to spend money on movies, plays, or concerts because declining health keeps us closer to home. But, that may be offset by more money spend on home options: Netflix, High Speed Internet, bigger TVs and so forth. Hobby costs can also rise as we spend more time at home.

- Transportation costs tend to drop as we age. The need for two cars usually disappears at some point. No commuting means lower gas and upkeep costs.

- Gifts and donations often see an increase. Money spent on grandchildren, more generous donations to religious and civic organizations are often the norm.


Occasionally I will receive a question from a reader wondering if a budget is still needed after retirement. My answer is always the same: absolutely. But, I will add the same information that is included this post: that budgeting shifts and adjusts depending upon your circumstance's and the stage of retirement you find yourself.

Is it "permissible" spend at a somewhat higher level when you first retire? I believe it is OK, if you accept that will mean a lower rate of withdrawal from your resources later on. During the first decade of our retirement, Betty and I set a withdrawal rate of between 4 and 5% of our accounts. Though not sustainable for too many years, it was appropriate for us at that stage of our journey.

Since 2013 that rate has dropped to just under 3%, or below the rate of growth of our retirement accounts as our needs and wants have undergone shifts. With proper planning and insurance coverage, I expect that rate of draw-down to be consistent for the foreseeable future. But, if not, we will adjust.

Retirement is not a static state. Move with it and your journey will be a satisfying one. 

17 comments:

  1. It's hard for me to gauge, since I cut back drastically for 5 years to assure an early (57) retirement. I live a modest lifestyle, by habit and choice; but I now travel less (arthritis) and spend more on recreation. As a single senior who relocated, socializing is very important, so more dinners/lunches out, more classes, gym memberships, etc. I lack dental insurance, so that expense has been an unpleasant surprise. I've been withdrawing 3.25% which, with pensions, is sufficient and will hopefully leave money for end of life care ... or a trip to Oregon:)

    I keep my budget on a sticky note, which has worked for me for years and kept me on target.

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    1. A withdrawal rate of 3.25% is quite good. Depending upon your mix of investments and incomes that low draw down should work well for you.

      Dental care may be the next big growth area. Very few health policies cover it even though dental work can be very expensive and as we age becomes more of an issue. I have a dental discount plan that saves around 50% on most visits and procedures, but even so my last crown was around $700....not the kind of cash I have lying around in a drawer!

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  2. One word for dentistry--after two bad years with crowns and root canals: MEXICO.

    Next time I need big work: MEXICO.

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    1. You would not be alone. As you know there is big business for Americans crossing into Mexico just across from Yuma or Nogales, AZ and San Diego for all sorts of medical needs.

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  3. Bob have you found the 4 to 5% rate working out okay? It's the rate I hope to use early in retirement. I've run the numbers several times, it seems doable for my first 5 years. I may need to find part time work to sustain it. I'd be interested to know what withdrawal rate your other readers are using.

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    1. That level of withdrawal was necessary for us early on and doable before the economy collapsed in 2008. Then, the investment growth couldn't sustain such a drawdown indefinitely. So, we scaled back to 3.5%. The way the world is today, a 4 or 5% rate of withdrawal runs the very real risk of you running out of money before you run out of you!

      I have just finished the rough draft of my 2015 budget and it looks like we will be under 3% for next year. Me being on Medicare and a generous gift from my father's estate makes a big difference!

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  4. Good morning Bob,

    You posted about one of my favorite topics - finances! I tried posting a couple of times yesterday; first, signed in under my google account, and then I tried to post “anonymous” (signing my name of course). Both times when I hit the publish button the comment disappeared, without the usual note that says something about “comment moderation”. Anyway, I’m not going to let a little posting frustration stand in the way of commenting on one of my favorite blogs, about one of my favorite topics! So here are my thoughts.

    It’s been just short of two years since my retirement. One of my biggest psychological adjustments is trusting in the security of our financial situation. We have a great fee based financial advisor. Using the professional software program Money Guide Pro, he provided us with a complete analysis of our finances. This included social security optimization, recommended allocation within our portfolio, and a detailed retirement distribution cash flow chart that takes us through “End of Plan”, which is a nice euphemism for death! He updates this plan for us yearly, based on the current information.

    We are in good shape financially. To optimize our finances, we are delaying social security until age 70 (I’ll do spousal SS at age 66, and then convert to my own full at 70, assuming this option is still available). This puts the more volatile source of income (investments) at the front end of our retirement and the more stable (SS) after age 70.. We are fortunate to have pensions that supplement our income. So after age 70, the portfolio should be able to sit and grow, with no further withdrawals. This really becomes our long term care insurance. I have more confidence in our own funding, than through private LTC insurance companies.

    Regarding spending pattern as we age. Yes, it makes sense to enjoy what we have while we are still young enough to do so! This is an adjustment for me. After years of non-stop working, it has been hard psychologically to adjust to the fact that it is now OK to withdraw and spend from our portfolio. I think that I am doing better in this area, however. After 2 years, we remain financially very stable. We will be under budget again this year, and that is after some major unexpected expenses. I am starting to relax more about the finances. I don’t want to be old and infirm and wonder why I didn’t do the things I wanted to do when I had the health and finances to do so!

    So as I start to relax and become more confident about our finances (my husband does not have this problem!), I think it is time we started to increase the FUN factor for next year. Maybe a few more trips? My gut/emotions have to catch up with my intellect, and trust what I know to be true. Should the market crash or there were some other major financial disaster, we have reset buttons that we can push, and we will be fine.

    Bob, when you first retired, did you go through this psychological adjustment too? Thanks for a great post, on one of my favorite topics!

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    1. Google has had some issues with the comment section on this blog for at least the past week. It has, on its own, starting asking some commenters to type in those silly numbers. It has deleted or "lost" comments. I can only apologize and hope someone there notices and fixes the problems.

      You have taken about the only short term solution that is failsafe: send you comment to my by e-mail (satisfyingretirement@gmail.com) and I will post it for you.

      As I noted in the comment above we will actually have a drawdown of under 3% next year. What I didn't add is that in 2016 it will jump to 4.5-5% for that one year to fun a trip to Europe for our 40th anniversary. As you noted, we don;t want to skip the fun stuff while we are still young enough to enjoy it.

      Yes, I had serious panic/psychological adjustments to go through early on. I couldn't relax and I was sure we would be living in a cardboard box at some point.

      None of it was real...just my inability to accept that my planning was actually going to work!

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    2. Carol, you are definitely not alone in initially being a bit nervous at cutting the ties of a paycheck, and transitioning to living off of a portfolio instead. My first two years in retirement were fraught with checking and rechecking our net worth, our withdrawal rate assumptions and our spending rate.

      I would say we began to relax and let the air out sometime during year three. At that point we better understood our 'new' lifestyle, we'd had ample opportunity to run, rerun, and review our numbers both as a couple, and with our financial advisor, and it was clear that not only did we have more than enough, we had lots of options to fall back on should the market take a nose dive.

      I once took a motorcycle safety course where the instructor admonished that we should never ride at 100% of our ability, but rather, should always hold something back in reserve in the event of an emergency. This is sage advice for many aspects of life, including how we handle our retirement finances.

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  5. Our approach in early retirement has been somewhat conservative, in that we are ignoring future sources of income like Social Security, and instead utilizing a withdrawal rate of 2.6% that should be easily sustainable for the rest of our lives. We set our annual budget based on the value of our portfolio on January 1 of each new year, and then adjust our our various budget accounts accordingly. So far, since our 2011 retirement, our portfolio has done nothing but grow, but we are prepared to adjust our spending downward in the event of a prolonged bear market. Although I'm well aware that retirement calculators take both bull and bear markets into account when projecting portfolio longevity, I simply can't imagine continuing to spend at the same rate should we see a repeat of what occurred in 2008/2009. I'm just not cut of out of sturdy enough stock.

    Beginning at age 65, we'll see a nice uptick in our budget when a couple of pensions, Social Security and Medicare begin to kick in. Not entirely sure what we'll do with these additional funds, but it's nice to know they'll be available. As brand new grandparents, we're currently leaning toward using them to fund some nice family vacations. :-)

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    1. We will be going with the grandkids to Disneyland next month......priceless!

      For 2015 it looks as though we will only need to withdraw at 2.8%. That feels good.

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  6. I was nervous for about 6 months, and then confidence grew that our plan was right. I have checked net worth, investments, and income-expenses every 6 months for 19 years since retirement. Usually, no changes are needed. A few tweaks now and then have sufficed. We did a lot of traveling early on, but interest diminished as we grew older. Now we concentrate on helping our son develop his business and improving our home.

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    1. I can see travel interest tailing off at some point down the road, too. I have plotted out some trips that take us 8 years into the future, but after that who knows.

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  7. You're absolutely right, expenses shift "depending upon your circumstance's and the stage of retirement." Worked-related go down; travel go up then down; health care go up. But as I point out in my US News Money article "Put a Lid on Your 5 Biggest Retirement Expenses" according to EBRI housing remains the top expense, as people over age 50 spend an average of 40 to 45 percent of their household budget on housing and housing-related items such as utilities, home insurance, home furnishings, gardening and yard expenses. Anyway, good, helpful post.

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    1. Is the house and house-related portion that high? I have never figured it out as a percentage of the total. At the moment our medical costs are still a large percentage because Betty is remains a part of the private market. But, my shifting to Medicare in May made a big difference.

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  8. I agree very much that expenses in retirement can be a roller coaster of an event for some, despite how much planning or years of work that went into thinking about retirement. I am noticing that there are costs shifts as you mentioned above, with much more going into health and legal, especially with a sick spouse. Thank you for the acknowledgment of the retirement navigation!

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    1. Navigation is a good word: sailing is never completely smooth or without course corrections - just like retirement. Thanks, Pierce.

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