A Less-Taxing Retirement
Fear of a too-small nest egg is the driving force behind many an advisor/client relationship. But such a high level of anxiety might be out of place.
A recent report published in the Journal of Financial Planning argues that most retirees spend significantly less money during their retirement years than their financial advisors realize. Ty Bernicke, a financial planner in Eau Claire, Wis., and author of the report, says that given the decline in consumer spending among retired individuals, aging baby boomers do not need to save or invest as much as previously thought.
This bucks conventional wisdom that says the average American is ill prepared to live comfortably in retirement. Bernicke says older retirees are spending far less than they can afford, so the traditional method of projecting retirement needs should be tweaked.
“Traditional retirement income planning generally assumes that a household's expenditures during retirement increase by a certain percentage each year to reflect historical inflation rates,” Bernicke writes in Reality Retirement Planning: A New Paradigm for an Old Science. “This type of planning usually results in increasingly higher withdrawals from the retiree's nest egg.”
In order to project an accurate level of savings for retirement, Bernicke says advisors need to account for an inverse relationship between age and spending. He offers as proof of that disparity the results of the U.S. Bureau of Labor's 2002 Consumer Expenditure Survey. The survey shows a 27 percent decline in average annual expenditures between the 55-to-64 age group and the 65-to-74 age group, and another 26 percent drop between the 65-to-74 age group and people over 75.
The key question is whether the spending decreases are voluntary or necessary. Citing academic research by Kenn Tacchino and Cynthia Saltzman that indicates those 75 and older spend less than 65-to-75-year olds despite similar income, Bernicke concludes the pared spending is voluntary.
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