45.9% spend more after they retire

A key factor in determining whether you can afford to retire is estimating how much you will spend in retirement. Experts say most will likely spend less because they have fewer overall expenses as a result of not working.

But, not everyone spends less.

In a recent study from the Employee Benefit Research Institute, nearly half of those studied ended up spending more. Those who did increase spending weren’t just the well off, but were represented across all income levels.

A few highlights from the study,

  • Median household spending dropped in the first few years after retirement. The reduction was 5.5% from pre-retirement levels for the first two years and 12.5% in the third and fourth years. After the fourth year, reductions in spending leveled out.
  • While the average amount of spending fell, a large percentage of households experienced increases in spending after retirement. 45.9% of those studied spent more in the first two years after retiring.
  • Those that spent more were not exclusively affluent households, but were distributed similarly across all levels. Of those who spent more, 28% spent 120% more than their pre-retirement level. After six years, 23.4% of households were still spending more.
  • In the first two years after retirement, transportation spending slowed the most. Median spending on transportation reduced by 25.1%.
  • Median of households in the study had mortgage payments before retirement, but no mortgage after retirement.

View the original study at here.

I have a theory that, unfortunately, a large number of people, once they gain access to their 401(k) savings in retirement, will not have sufficient experience with disciplining and budgeting their spending habits. As such, many will blow through their retirement nest eggs before they realize what they have done.

It is important to give serious thought to how much you will spend in retirement and how you plan to derive reliable and lasting income from your nest egg funds. Given increasing lengths of retirement, rising healthcare costs, volatility in the markets, and the general tendency of people to overspend, running out of money in retirement is probably easier than you think.

I wrote a report to help people solve these problems that includes: an easy method for estimating how much retirement income you may need, a list of ways to reduce expenses in retirement, and information on how to secure guaranteed income so that, regardless of what the future may hold, you will never run of money in retirement.

Download a free copy of the report at this link.

What are your thoughts?

  • Are you surprised to learn that so many people actually increase their spending during retirement?
  • Are you surprised that those who do aren’t just the well-to-do?
  • What do you think of my theory that many people will unwittingly exhaust their savings because they spend too much?
  • Did you know you could secure guaranteed income so that you will always have a “paycheck” during retirement?

The secret to saving the Baby Boomers

By 2030, the last of the Baby Boomers will reach retirement age. At that time, nearly one in five Americans will be over the age of 65.

Many experts predict a retirement crisis will be arriving shortly thereafter.

The issue here is money…

  • Will Baby Boomers have saved enough?
  • Will the money they have saved last?
  • What will be the status of social safety nets like Social Security and Medicare?
  • Will the “do-it-yourself” 401(k) retirement model succeed in generating reliable income for such a sizeable retired population?
  • Will the possibility of market crashes, bubbles, and corrections complicate matters even more?

The solution for saving the Boomers

The solution for saving and assuring the future security of Boomers is income.

Especially guaranteed income that is immune to market turbulence, adjusts for inflation, and lasts for a lifetime no matter how long a person lives.

I’m not talking here about income to send people on exotic vacations or take trips around the world.

I’m talking about basic income that affords a person the ability to live with dignity.

  • This means income to buy food when you are hungry, to keep you warm when it’s cold, to help pay for medicine, everyday necessities, and keep a roof over your head.
  • This means income that will be there regardless of the future – no matter how long you live and no matter what your physical condition.
  • This means income to provide a backstop, a safety net, and insurance.
  • This means income powerful enough to say to a spouse with certainty, “I love you and even though one day I may be gone, this money will be here for you no matter what the future may bring.”

If a person lacks such basic income, it really can be a crisis.

Heartbreak. Destitution. Poverty. Hunger.

So, how does a person obtain the necessary income to cover his or her basic needs?

There are generally two sources for generating income in retirement, pooled income and investment income.

Pooled Income versus Investment Income

Pooled income should be used as insurance to protect and guarantee income needed for basic living expenses. After that, investment income should take the lead covering additional expenses and legacy planning.

Differences between pooled income and investment income.

Pooled Income

  • Pooled income – while still expensive – is the cheapest way to create lasting income and it provides the greatest guarantees for future security.
  • Money is placed in a shared “pool” and funds are withdrawn to provide income for participants.
  • Pools are typically administered by large insurance companies, pension plans, or government entities.
  • Income is usually guaranteed for life.
  • Depending on the source, cost of living adjustments may or may not be provided.
  • Except for survivor benefits, pooled income provides no inheritance for heirs.
  • Funds are illiquid – except for the checks a person receives every month.
  • For those living the longest, pooled income generates an enhanced yield that is virtually impossible to beat using conventionally traded instruments.
  • Examples of pooled income include Social Security (were it funded properly), traditional “defined benefit” pension plans, and annuities.

Investment Income

  • Investment income is generated by investment funds.
  • Investment funds tend to be more liquid and provide a greater appearance of control.
  • Generally, investment income requires a larger starting balance (when compared with pooled income) to generate the same sustainable targeted income amount.
  • May fluctuate based on the ups and downs of the markets.
  • Generally provides no guarantees.
  • Principle can suffer from market turbulence and funds can be depleted.
  • Is compatible with leaving inheritances, assuming funds last.
  • Allows for greater liquidity to make larger, immediate expenditures.
  • Funds may be invested in a wide array of investment alternatives.
  • Examples of investment income sources include IRAs, personal investment accounts and 401(k) type savings plans.

My intent is not to argue that either type of income is necessarily better than the other.

Both income types serve a valuable purpose depending on the need.

I am generally as opposed to relying on investment income to cover basic expenses as I am for using pooled income to finance luxuries.

The goal is to align the income types so as to provide the highest possibility for future success.

Covering the basics

We can help save the Baby Boomers by encouraging them where possible to seek guaranteed pooled income to cover their basic income needs in retirement.

The more basic income Boomers obtain from such sources, the safer they will be from running out of income and facing serious financial hardship in their senior years.

Have you ever wondered how much money you will need to cover basic living expenses in retirement? Click here for an easy way to calculate the income amount you may need.

So what do you think?

  • How well do you believe the stock market will serve to support the income needs of Boomers during their retirement years?
  • If you knew you had enough guaranteed income to support your income needs in retirement, would it give you peace of mind?
  • What do you think of the idea of forgoing inheritance for kids if it means gaining income security for your retirement?
  • What steps could you take to make your living expenses in retirement more affordable?

How long will you live?

Everyone hopes for a long and happy life, but did you know economists actually consider living too long to be a risk?

They even have a name for it, “longevity risk.”

It is the condition of living so long that you end up outliving your money.

Find out your average life expectancy using Social Security’s “Life Expectancy Calculator”.

Because no one knows for sure how long he or she (or a spouse) will live, the issue of life expectancy can complicate retirement planning. Think of it like trying to plan a dinner party without knowing how many guests are going to show up.

The good news is, with a few simple planning steps, most of the worries surrounding this issue can be solved.

Facts about the “risk” of living too long,

  • People are living longer now than ever. Improvements in medical technology, disease prevention, treatment, and management have lead to longer and longer life spans.
  • How long can a person live? The answer is really unknown. So far, the oldest living person on record was Jeanne Calment of Arles, France. Jeanne died in 1997 at the age of 122.
  • What is the average life expectancy for U.S. retirees? If you are 65 today, average life expectancy is 84.3 for a man and 86.6 for a woman. Note…these are only averages, so half of the population will live even longer!
  • Marriage is a factor. Married people retiring today have about a 50% chance that at least one member of the couple will live to age 92.
  • Women are more at risk. Because women live substantially longer than men, they are much more likely to become impoverished in older ages.
  • Your precise risk is unknown. An individual person’s exact longevity risk is difficult to determine because it is derived from a mix of factors including, available retirement funds, rates of return on future investments (or market losses), retirement spending rate, inflation, future medical expenses, family health history, and lifespan.

How to solve the problem of longevity risk?

The most important factor for overcoming longevity risk is having enough INCOME to pay your basic living expenses in retirement – especially guaranteed-for-life income that lasts no matter how you live and adjusts for inflation.

For most retirees, guaranteed life income comes from three major sources:

  • Social Security
  • A company (or government) pension
  • Life annuities

Click here for a simple way to calculate how much income you need in retirement and learn FIVE ways to make the cost of retirement more affordable.

Often, people end up combining several sources of income to achieve their retirement goals. The idea isn’t necessarily to have all of your income come from guaranteed sources, but enough to cover your basic living expenses and give you peace of mind. Studies show that retirees with more guaranteed income have less stress and more enjoyable retirements.

So what do you think?

Have you ever thought living too long could be a risk? Do you know of anyone who has outlived their money? What about the issue of women being more at risk? As a husband and a father, I do not want to leave the risk of my wife suffering poverty in very senior age to chance.

Feel free to email me comments or questions. You can also post comments below.