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.
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.
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?