Go-Go, Slow-Go, No-Go: How Much Do Retirees Actually Spend?
By Travis J. McShane, CFP, CFA
Retirement planning can be broken down into two major categories known as the accumulation period and decumulation period.
During the accumulation period, we focus our energy on saving money and building wealth so that we are not solely reliant on employment income to meet our ongoing living expenses in the future. Most of us do this by saving to 401k/403b/457 plans, IRA/Roth IRA accounts, brokerage accounts, savings accounts, and/or acquiring real estate.
After a few decades in the accumulation period, it is often difficult for people to switch hats and transition to the decumulation period. Here are a few of the primary questions that come up:
- How much can I spend each year during retirement?
- How much should I spend each year during retirement?
- How do I not outlive my money?
- What sort of lifestyle can I maintain based on what I’ve saved?
Since it is likely that we will also spend a few decades of our lives in the decumulation period (health permitting), these are important questions that should be thought through strategically and reviewed periodically as life changes.
We have a framework that we use internally for our clients that helps answer these questions which then informs how we manage investment portfolios. In most cases, sustainable ongoing retirement income is one of the highest priorities our clients have.
The traditional way to solve for this is to determine how much you can withdraw each year, and then factor in an annual cost of living increase so that your purchasing power is not eroded by inflation pressures over time. We then take this projected annual spending amount and compare it to what you’ve grown accustomed to living on while still working and assess whether there is a surplus or shortfall to maintain your current lifestyle.
While we already make conservative assumptions in our projections related to investment returns and expected longevity, research suggests that an additional margin of safety is implicit for most people in that real retirement spending tends to decline over the course of retirement.
A study published in the Journal of Financial Planning by Ty Bernicke suggests that real retirement spending declines by 15% every 5 years and that a retiree in their late 70s spends less than ½ of what they were spending in their late 50s on an inflation adjusted basis.
Michael Kitces, a respected personal finance speaker/author we follow, has coined the following stages to sum up what the research outlines:
- Go-Go: Newly retired, more travel, more dining, checking off some bucket list items.
- Slow-Go: Slowing down from the bigger ticket expenses mentioned in “Go-Go”
- No-Go: Potential for medical expenses to take up a larger portion of spending.
While retirement spending varies from person to person, it is helpful to observe what retirees on average experience and use that to help inform how we plan out our own spend down plans. Unless you plan on maintaining the “Go-Go” stage for the full duration of retirement, there may be an additional margin of safety baked into your retirement plans already, so hopefully that helps provide some peace of mind.
Please reach out if you have any questions, or if you’d like us to put together an updated retirement projection for you.