Week 44 Day 4: The Retirement Spending Smile: Spending Declines With Age

Real retiree spending by age: 65-70: 100% of initial spending (travel, dining, new hobbies). 70-80: approximately 80% of initial spending (less travel, more home time). 80-85: approximately 70% of initial spending (reduced activity). 85+: variable. Some spend 60% (very frugal). Others spend 120%+ (nursing home, medical care). Average: approximately 80%. The natural decline in spending means the 4% rule is actually MORE conservative than it appears.

The spending smile in practice: (1) Blanchett (2014) analyzed Bureau of Labor Statistics data and found that real (inflation-adjusted) retirement spending decreases by approximately 1-2% per year from ages 65-85. A retiree spending $60,000 at 65 typically spends approximately $45,000-$50,000 at 80 (in today's dollars). (2) The decline is not uniform across categories: Housing costs: decline (mortgage paid off by 70-75 for many). Transportation: decline (less commuting, eventual driving cessation). Travel/entertainment: decline after 75 (health limits). Food/dining: slight decline. Healthcare: increases, but Medicare covers most costs. Long-term care: potential sharp increase (median nursing home: $108,000/year; median home care aide: $62,000/year). (3) Planning implications: (a) The 'Go-Go / Slow-Go / No-Go' framework. Go-Go years (65-75): spend freely on experiences. You will not get these years back. Slow-Go years (75-85): spending naturally declines. Budgets tighten automatically. No-Go years (85+): spending drops further unless long-term care is needed. (b) The spending smile means the 4% rule overestimates required savings by approximately 10-20%. A $1M portfolio (4% = $40K/year) may only need to be $850,000-$900,000 if spending declines as expected. (c) Long-term care insurance or a dedicated reserve fund ($200,000-$300,000) addresses the potential late-life spending spike without requiring the entire portfolio to be larger. (d) Allocate 'experience budget' to the Go-Go years. Spending $5,000 on a trip at 67 creates decades of memories. The same $5,000 at 87 may not be possible. Front-load experiences.

Blanchett's (2014) 'Estimating the True Cost of Retirement' is the definitive study on the retirement spending curve. Using Consumer Expenditure Survey data, Blanchett found that real spending decreases by approximately 1.0% per year in early retirement and approximately 2.0% per year in later retirement, creating the 'smile' shape (the late-life healthcare spike bends the curve upward for some retirees but not all). The average retiree at 85 spends approximately 25-35% less in real terms than at 65. The implications for required savings are significant: Blanchett estimated that accounting for the spending decline reduces the required savings at retirement by approximately 10-20% relative to constant-spending models. This interacts with the SWR research: a declining spending plan (4% at 65, declining by 1% per year in real terms) has a much higher success rate than a constant 4% plan -- approximately 99% vs. 95% over 30 years. The long-term care exposure is the primary tail risk: approximately 50% of Americans turning 65 will need some form of long-term care, and approximately 15% will need nursing home care for 2+ years (Kemper et al., 2005). The median cost of a private nursing home room is $108,000/year (Genworth, 2023), which can rapidly deplete a portfolio. Self-insuring ($200,000-$300,000 earmarked for potential LTC) is one approach; hybrid life/LTC insurance is another. Incorporating this tail risk into retirement planning -- either through insurance or a dedicated reserve -- addresses the No-Go phase spending spike without requiring the retiree to hold a larger total portfolio.