Estimating retirement expenses over the entire duration of a client's retirement years is a fundamental part of retirement planning. Yet there is surprisingly little agreement from planners about the spending behaviors of clients as they go through retirement.
Some suggest that retirement spending rises as clients age, due to the accumulating impact of health care expenses. Others suggest that retirement expenditures decrease, as clients reduce their spending in areas like travel and restaurants. Still others suggest that retirement spending is relatively level and simply keeps pace with inflation, as the increases in one category (e.g., health care) offset the decreases in others (e.g., travel and restaurants) - which, notably, is also the implicit assumption of steady inflation-adjusted spending that underlies the research regarding safe withdrawal rates and how much income is sustainable from a portfolio.
So which is it? A growing cadre of research suggests that in reality, client spending probably does decrease over time... with some notable exceptions. And if you don't use a proper assumption, you may force clients to save more than is needed, or retire later than is necessary!Read More...