When it comes to retirement spending, many people—including advisors—start with an assumed retirement income goal and project that amount plus inflation over the lifetime of the retiree.
When you look at the statistics and gauge actual future retirement expenses, however, it’s clear this cookie-cutter approach isn’t accurate.
Why? Because of something known as the “retirement spending smile.” This concept refers to retirees’ spending and consumption patterns as they proceed through their retirement and what this means for our retirement strategies.
Read on for more about this phenomenon and how to keep it in mind as you plan for your future.
What Is the Retirement Spending Smile?
In a 2014 article for the Journal of Financial Planning titled “Exploring the Retirement Consumption Puzzle,” David Blanchett discussed the actual spending patterns of retirees and their impact on retirement savings.
Research shows that retirees tend to spend more early in retirement as they enjoy activities like traveling, dining out, and their favorite hobbies. As retirees age and slow down, spending decreases as they stay closer to home.
Spending picks up again later in retirement as they deal with increased medical expenses, including more doctor’s appointments, medical tests, procedures, and medications. Then, as they reach the end-of-life stage, retirees tend to see a spike in expenses for needs like long-term care and even more healthcare costs.
How Could This Impact My Retirement Savings?
Good question! There are two main effects of the retirement spending smile.
First, many tend to over-save (and create more stress and anxiety) when building a retirement plan around static rates. Instead, it’s wiser to account for potential changes in your future spending habits.
Additionally, the steep drop in retirement spending could hurt the economy if younger people don’t engage in enough activity to offset the decline.
We’ve seen this concept first-hand at Carlson Investments with our clients, which is why we believe in its validity. Younger retirees are looking to reap the fruits of their labor early in the retirement process by getting out and enjoying experiences while they can still enjoy their health. But as aches and pains set in, they start to slow down and consume and spend less until they need more medical services.
Keep this in mind when preparing for a retirement income plan. While saving for a comfortable retirement is essential, so is enjoying the earlier stages of life!
For tailored guidance and a strategy based on your realistic retirement income and spending, speak to a Carlson Investments representative today. We’ll ensure you can make the most of today and have security down the road.
Carlson Investments does not provide tax, legal, or accounting advice. This content has been written for informational purposes only. Always consult your individual tax, legal, or financial professionals for advice tailored to your situation.
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