Most retirement research assumes that retirees spending from a portfolio will seek to maintain a "real" inflation-adjusted standard of living throughout their retirement, just as they implicitly would have if their portfolio had been paid out as a steady pension with an annual cost-of-living adjustment. However, despite the simplicity of this assumption, retirement research has increasingly shown that retirees actually experience a decline in real spending through their retirement, as the early "go-go" years transition to less active "slow-go" years and then finally wind down in a series of "no-go" years with little discretionary spending.
In a new study contributing to the literature on this subject, David Blanchett of Morningstar has issued a new study entitled "Estimating the True Cost of Retirement" that finds in reality, real retiree spending decreases slowly in the early years, more rapidly in the middle years, and then less slowly in the final years, in a path that looks less like a slow and steady decline and more like a "retirement spending smile" instead. Implicit in these results is an acknowledge that, despite the common fears, even the uptick of health care expenses in a retiree's later years are not enough to offset all the other spending decreases that tend to occur as retirees transition into the "no-go" years and other discretionary expenses fall significantly.
The implications of this research are not only that financial planners should be more cognizant to assume some level of real spending decreases throughout retirement (Blanchett's research suggests this may be especially true for more affluent retirees who tend to have more discretionary spending that winds down over time), but also that the traditional research may be somewhat overestimating the amount of funds needed to retire in the first place, as a lower average spending level across all the retirement years means it simply may not take quite as much to retire as is typically assumed or modeled in a typical financial plan!
