How do retirees spend the money they’ve saved? Research and analysis on how they spend their retirement savings varies: some is based on the premise that retirees spend their savings at a constant rate; other research challenges that notion and argues that it’s not quite than simple.
Wade Pfau, Principal at McLean Asset Management, in a recent article appearing in Forbes discusses analyses. And that, in turn, has implications for retirement saving itself.
Pfau cites a book by the late Michael Stein in which Stein argues that retirement has three phases, demarcated by age: through age 75, an active period marked by discretionary spending whose expenditures include travel and restaurant and keeps pace with inflation; ages 75-85, a less active period with less discretionary spending that does not keep up for inflation; and age 85 and older, a time with more modest spending that also trails inflation.
And, Pfau points out, Ty Bernicke of Bernicke & Associates Ltd argues that retirees’ voluntary spending declines throughout retirement, but inflation mitigates those dropping expenditures. Pfau cites statistics from the Consumer Expenditure Survey (CES) that back the notion that discretionary spending falls, but posits that concern about inflation may be too great.
“Suggesting that retirees should plan for constant inflation-adjusted spending may overestimate the required retirement savings that many households will require for a successful retirement,” writes Pfau. In addition, he argues, inflation may not have a uniform effect, noting that inflation can be higher for some commodities and services than for others.
Further, Pfaus says, not every household should base its planning on the premise that spending will gradually decline, since for some of them, spending will increase with age.
“Conservative plans will call for preparations beyond what happens in the average outcome,” notes Pfaus.
Wade Pfau, Principal at McLean Asset Management, in a recent article appearing in Forbes discusses analyses. And that, in turn, has implications for retirement saving itself.
Pfau cites a book by the late Michael Stein in which Stein argues that retirement has three phases, demarcated by age: through age 75, an active period marked by discretionary spending whose expenditures include travel and restaurant and keeps pace with inflation; ages 75-85, a less active period with less discretionary spending that does not keep up for inflation; and age 85 and older, a time with more modest spending that also trails inflation.
And, Pfau points out, Ty Bernicke of Bernicke & Associates Ltd argues that retirees’ voluntary spending declines throughout retirement, but inflation mitigates those dropping expenditures. Pfau cites statistics from the Consumer Expenditure Survey (CES) that back the notion that discretionary spending falls, but posits that concern about inflation may be too great.
“Suggesting that retirees should plan for constant inflation-adjusted spending may overestimate the required retirement savings that many households will require for a successful retirement,” writes Pfau. In addition, he argues, inflation may not have a uniform effect, noting that inflation can be higher for some commodities and services than for others.
Further, Pfaus says, not every household should base its planning on the premise that spending will gradually decline, since for some of them, spending will increase with age.
“Conservative plans will call for preparations beyond what happens in the average outcome,” notes Pfaus.
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