How do your pension costs evolve over time? Do you spend more, less or about the same during your retirement as when you were working?
It’s a crucial question. Calculating how much you will spend in retirement is the first step in your retirement planning. And that determines when you retire, how much money you need to retire, when you start collecting Social Security, and so on.
As a fair estimate, you should expect to spend 70 to 80% of your pre-retirement income annually on retirement. It could be a good start, but most experts consider it waste.
To do it right, you need to estimate how much you are spending where, when, and for how long using a spreadsheet or other tool. You need to consider not only inflation, but how your spending habits will change over the course of your retirement – in the good, bad and ugly years.
Fortunately, data exists to help you determine how spending changes over time in retirement. And much of the research that’s been done on this topic implies that your spending will decrease as you get older.
While he was at Morningstar, (MORN) – Get Morningstar, Inc., pension expert David Blanchett published Estimating the True Cost of Retirement, a study that found that spending by true retirees decreases slowly in the early years, faster in the middle years, and then less slowly in recent years, on a path that looks less like a slow and steady decline and more like a ‘smile for retirement spending’. Read the Retirement Spending Smile and Estimating Changes in Retirement Spending.
Do retirees want constant, increasing, or decreasing consumption? A survey from Boston College’s Center for Retirement Research shows that spending falls in retirement, but limitations — such as wealth and health — are more important than real preferences. For example, the study found the following:
- Over the course of retirement, household consumption falls by 1.5 percent to 1.6 percent every two years (or about 0.7 percent to 0.8 percent per year).
- Consumption of wealthy and healthy households, on the other hand, remains virtually unchanged, decreasing by just 0.3 percent each year during retirement.
- For example, wealth and health limits help to explain, at least in part, the observed pattern of declining consumption.
According to the researchers, there are the following policy implications:
- In retirement, retirees tend to seek constant consumption.
- Because consumption losses are greater for households without wealth, the findings point to a shortage of pension savings.
- Social Security is an essential source of income for them to maintain their preferred lifestyle.
According to the researchers, many questions remain. Household top quintile or decile spending continues to flatten; do survival expectations matter; and do other factors, such as risk aversion or donation incentives, influence consumption pathways?
So, what are the opinions of other experts on the Center for Retirement Research report?
Sharon Carson, executive director of the retirement strategist team at JP Morgan Asset Management, agrees that a lack of savings is a problem for many people and can lead to unintended budget cuts. (According to Carson, the study’s median wealth level was $271,248.)
Carson, on the other hand, believes that not all households, especially those more affluent, want consistent spending. She pointed out, for example, that the report’s authors of the Center for Retirement Research’s top third of participants may not be indicative of those with significant assets. Therefore, she agreed that more research on different wealth levels would be beneficial.
How does Carson’s study compare to that of the Center for Retirement Research at Boston College, especially at higher levels of wealth?
Get JPMorgan Chase & Co. using anonymous and anonymized JPMorgan Chase Bank (JPM) data. At one point, Carson’s team is seeing evidence in report data that higher spending peaks for Chase households around middle age.
“If we look at households with at least some retirement income — including households with a mix of work and retirement income — peak spending around midlife isn’t as spectacular as it is for the total population, including those with income from work,” she says. added. “This is true for households with non-household assets estimated to be between $250,000 and $750,000.”
According to JP Morgan Asset Management Research, average household expenses for those with a bachelor’s degree or higher starts at $88,890 for those 45-54, drops to $81,010 for those 55-64, $69,990 for those 65-74, and ends up being $55,970 for those 65-74. those 75 and up.
Carson also pointed out that JPMorgan is in a unique position: it has a large database of households, many of which have estimated net worth of more than $1 million. “The households with $1 million or more in non-household wealth had a greater peak in their spending around middle age than those with less than $1 million in non-household wealth,” they say.
So, what does it come down to when you’re trying to figure out how much money you’ll need in retirement?
Well, if you’ve saved enough for retirement, your spending will definitely — by choice — drop modestly over time. However, if you don’t have enough money set aside and/or are in poor health, your spending will drop more slowly. If you want to avoid this, now is a good time to increase your savings and possibly postpone your retirement.
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