Why You May Need 20% Less Spending in Retirement. The Retirement Spending Smile | The Limitless Retirement Podcast

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Think you need a steady inflation adjusted income stream to cover all of your living expenses in retirement? That’s the conventional wisdom. And it’s the basis for most retirement plans and financial calculators out there. But what if? What if the reality is different? What if retirees actually spend their money in a way that means you might need up to 20 % less in retirement income than you think?

Understanding this could be a game changer, giving you more freedom and less stress as you plan for retirement.

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The reason for this discrepancy lies in a little known, rarely discussed concept known as the retirement spending smile. This research reveals a surprising truth about how retirement spending habits actually change over time, following a distinct pattern rather than a flat line of expenses year after year. Understanding this pattern could be a major impact on your income planning.

So in this video, I’ll dive into the details of what the retirement spending smile is and how it might affect you.

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Hey there, I’m Danny Gudorf, a financial planner and owner of Gudorf Financial Group, where we help individuals and families over 50 plan for a limitless retirement. The research we’re focusing on today comes from a paper titled, Estimating the True Cost of Retirement. This paper was authored by David Blanche of Morningstar. In this study, Blanche found

that retiree spending patterns actually don’t align with conventional assumptions of a steady inflation adjusted withdrawal rate from their portfolios. Instead, retirees tend to follow a more dynamic path, a path shaped like a smile with three distinct phases. First, there’s a go-go phase, then a slow-go phase,

and last a no-go phase. And this concept was further popular.

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And this concept was further popularized by Michael Stein, a CFP professional who coined these memorable terms to describe how spending shifts as people age. So let’s unpack these three phases in detail, starting with the go-go years. The early years of retirement often referred to as the go-go years, and it’s easy to see why. During this time, retirees generally have higher than average

They’re full of energy, full of health and time and a sense of newfound freedom. This is when retirees feel most capable and are eager to do the things they’ve always dreamed of. Whether that means traveling the world, exploring new hobbies or simply enjoying life with their newfound time. Many people imagine themselves checking off bucket list items first. Finally,

taking those dream vacations and spending more freely on the experiences that enhance their quality of life. Naturally, this means their discretionary spending tends to be higher in these early retirement years. However, as retirees move into their mid to late seventies, things start to shift. This next stage is called the slow go phase. The slow go years are characterized

by a gradual decrease in spending. Retirees may still want to travel or participate in hobbies, but they do so less frequently. It’s not necessarily because of financial constraints more often. It’s simply a matter of changing interest or the fact that they don’t have quite as much energy as they did before. They start to stay closer to home or

They favor a more relaxed lifestyle over the frequent trips or adventures they initially planned on. The level of discretionary spending starts to taper.

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The level of discretionary spending starts to taper off and overall living costs begin to decline as a result.

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Finally, we arrive at the no-go years, which is typically when someone is in their late 80s or beyond. During the no-go phase, retirees tend to become significantly less active, which results in even lower discretionary spending. They may not travel at all, and their focus shifts primarily to day-to-day comforts and necessities. However, one thing worth noting,

is that in this stage, medical and healthcare expenses can start to increase. Although these costs rise, they usually aren’t enough to offset all other areas of suspens-

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they usually aren’t enough to offset all the other areas of spending that have significantly decreased by this point. Contrary to popular fears, the uptick in healthcare costs often remains well within manageable limits and doesn’t lead to an overall spike in total spending. Interestingly, Blanche’s research shows that the spending smile pattern is even more pronounced for affluent retirees.

This is because those with higher net worth tend to have more discretionary spending in the go-go years, which winds down even more noticeably over time. On the other hand, lower net worth households experience less of a decline in their spending during the middle years because they typically have fewer discretionary expenses to begin with. Their spending pattern tends to be more stable

with less pronounced changes in the different retirement phases. The key takeaway though from Blanche’s research is that retirees may need up to 20 % less in savings than what conventional wisdom suggests. This is because the typical flat spending model doesn’t reflect how retirees truly spend. Instead of assuming a steady inflation adjusted spending rate,

the retirement spending smile captures the real ups and downs that come with different phases of retirement. The traditional approach to retirement planning has often relied on the 4 % rule, a rule of thumb that suggests retirees can safely withdraw 4 % of their portfolio annually adjusted for inflation. And this will ensure their retirement savings last throughout retirement.

The simplicity of this approach makes it very popular out there, but it’s also important to realize that it doesn’t always account for the changing nature of spending needs across these three retirement phases. The reality is that spending is higher in those active go-go years and dips during the middle, slower years and may increase slightly again in the no-go years. However,

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even with that uptick in spending, rarely do we see a very high spending level.

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Unfortunately, many retirement plans and online calculators are still built on this outdated assumption that retirees spending will be flat throughout their retirement. As a result, people may end up over-saving and setting aside more than they truly need to ensure a comfortable lifestyle. While saving more isn’t necessarily a bad thing, it can lead to

unnecessary sacrifices during your working years when you could have enjoyed some of that money instead. Or it could cause you to retire two, three, or even five years later than you technically could. To illustrate how the retirement spending smile can be applied in real life, let’s look at an example couple.

His name is Bill. Bill is 65 years old and is planning to retire sooner. He has a sizable pension that he has earned during his time in the healthcare industry, along with some additional savings in his retirement accounts. The combination of these resources will be used to fund his retirement lifestyle. When we started working with Bill’s retirement plan, the numbers didn’t quite add up.

His initial plan assumed a static inflation adjusted spending level throughout retirement. It projected that he would cut things pretty close by the time he reached age 95.

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with only a small buffer left in his portfolio. It was clear that his approach was overly conservative and it risked limiting the quality of his retirement life. To address this, we incorporated a few items in his retirement plan. One was the retirement spending smile and two was a dynamic income distribution approach to his retirement spending.

This allowed us to create a more realistic and sustainable plan, one that gave Bill the flexibility to enjoy his early retirement years without worrying too much about running out of money later on. In Bill’s go-go years, we factored in a higher level of discretionary spending to account for his passion projects, like restoring the old Monte Carlo or his plans to travel.

we allocated a larger portion of his pension and savings towards these pursuits.

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understanding that this is when he’d be most active and most eager to spend on those experiences. By doing so, we made sure Bill’s retirement started off on the right foot, filled with the freedom and activities he had always dreamed of. As Bill moved into his slow-go years, we projected that his spending would naturally start to decline. This reduction in spending wasn’t forced,

Rather, it was a reflection of his changing lifestyle. In his mid to late 70s, Bill still might travel, but less frequency. He’ll focus more on spending time with family and enjoying hobbies closer to home. During this phase, we anticipated that he wouldn’t need to draw as much from his portfolio as his discretionary expenses would be considerably lower.

Finally, in the no-go years, we plan for bill spending to decline even a little bit further, with the exception of an uptick later on in life to cover any healthcare or long-term care expenses that might be needed.

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By factoring this into Bill’s plan, we ensured that he had adequate resources for everything he need without cutting back on essential comforts. For Bill, this was a game changer. Not only did it give him confidence that his money would last, but it also allowed him to fully enjoy his early retirement without the nagging worry that he might outlive his savings.

The plan was rooted in research, evidence, and realistic understanding of how retirees actually spend their money and not just outdated assumptions. So there you have it. It’s the surprising truth about how retirees actually spend their money in retirement and what it might mean for how much you need to save for your retirement. Armed with this knowledge, take a look at your own retirement plan.

Does it incorporate the retirement spending smile? Or does it account for the natural ebb and flow of spending throughout your retirement years?

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If not, and you’re getting close to retirement, it might be time to get your retirement plan updated.

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Once again, I’m Danny Goodorf, owner and financial planner at Goodorf Financial Group. If you’re ready to discover how we can help you make the most of your retirement, visit goodorffinancial.com forward slash get started. This is where you can easily schedule a 20 minute introductory call with someone from our team to kickstart your free retirement assessment and start the planning for the future you deserve.