Live long and prosper

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You may be able to spend more in the early years of retirement than you thought. Retirement spending strategies have always been an important part of smart planning; incorporating new research about longevity and spending patterns of retirees leads to even wiser decisions.

We save for retirement for most of our working lives, so it makes sense that once we get to retirement we want as much attention focused on spending as there was on saving.  It can be a difficult balance between living well in the early years of retirement and ensuring that funds are available throughout our lives.  For those with more resources, there is new data in two key areas, life expectancy and spending patterns of retirees, that can help make planning more effective.

On average, life expectancy has increased one year per decade since 1950 and the news is even better for the wealthy.  According to recent analysis of the Social Security Administration’s Health and Retirement study by the Brookings Institute, men in the top percentile of household income can expect to live about 5 years longer than the average. The difference in planning for a 20 year retirement vs a 25 or 30 year retirement is significant, and requires a more strategic approach to spending.

Planning for a longer retirement may not mean making sacrifices during the early years of retirement, when most retirees are at their healthiest and eager to enjoy their new lifestyle, though.  For wealthier households, analysis of spending patterns of retirees shows that those with higher levels of spending tended to have faster declines in spending after age 65. Researchers believe this is not because they need to spend less, but because there is a natural decline in discretionary activity, and expenses, as we age.  Since households that spend more (in absolute terms) also tend to spend more on discretionary items, this decreased spending over time should be factored in to their retirement planning to allow for relatively more spending in the earlier, active years.

Health care is often feared as a wild card when estimating required retirement income. But even medical expenses do not have as dramatic of an affect for those with greater resources. Data on overall household spending shows that health care is usually around 10% of income for people at age 65 and increases to 20% by age 85.  This includes out of pocket payments as well as premiums for Medicare Part B and private Medigap plans. These plans cover about 80% of total medical costs. For high net worth retirees, these increases are covered by the natural decline in discretionary spending between ages 65 and 85, which averages a little over 20%. So, despite higher inflation on some items purchased by elders, including healthcare, overall spending needs decrease as we age due to reduced spending on clothing, education and travel.

Without strategic planning for spending in retirement, a straight line projection that increases spending by inflation throughout retirement can cause misleading results, and fail to best take advantage of the savings that we’ve built during our working years.  The Advisory Group works to vet and incorporate current research into planning for the benefit of our clients, applying as much attention to spending plans as savings plans.

Chart: UCLA Center for Health Advancement, Life Expectancy, Suicide and Wealth © 2016

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