One of the most difficult parts in Income Planning for our pre-retiree and retiree clients is all of the assumptions that need to be made to construct the plan. For example – how will spending change post-retirement from pre-retirement. One would think that spending would increase due to all of the “free time” that retirees early on in their retirement years discover. Travel, meals out, gifts for grandchildren and trips to see them, golf and other leisure activities would seem to take a larger and larger piece of the monthly income.
According to the Employee Benefit Research Institute (EBRI) – the studies are showing about half of the early retiree households spend just a little more than they spent during their working years. As time moves ahead the spending habits drop – which is understandable as folks age and become less mobile – generally speaking. Therefore an assumption that retiree spending increases dramatically during the early years of retirement seems not to be the case in the predominance of situations.
The patterns do not indicate that the income level has anything to do with spending habits as a percentage of monthly income. Meaning that one would think that the upper income level retirees would spend much more – as a percentage of their income – then say those that have modest monthly incomes. The data does not support that. It appears that retirees over the array of income levels spend a little more in the early years of retirement and that pattern tapers off as they age.
So you may ask then why is the Income Planning part of what we do for our clients so difficult? The challenge is that we need to make many various assumptions that are the heart of the outputted plan data. At best we are making an educated guesstimate. These assumptions include:
- Spending needs/habits
- Rate of inflation
- Rate of returns of various investments made
- Rate of increase in Social Security and Pension payments
- Assumed death of one (or both) spouses
- Planned major expenditures such as replacement of car and major home improvements
- Unanticipated healthcare expenses including Long Term Care expenses
As we often share with our clients when they view the reports that we develop for them – these reports are 100% not accurate. If we start from that point then the reality comes into focus a little clearer. The process of Retirement Income Planning is at best an art – taking into account all of the various foreseen and unforeseen scenarios. However, most clients come out of the planning process with a clearer image of what their retirement income plan looks like – and they can plan for spending accordingly. Course correction can be accomplished throughout their retirement years as new information presents itself.
For further information and more a more detailed look at the studies surrounding Retiree Spending Habits – go to the EBRI website – www.ebri.org – and review the study “Changes in Household Spending After Retirement” which was published in November 2015.