Get Real About Retirement Spending
A new theory suggests that you can comfortably save less now and spend more later. My take: Don't bet on it.
By Walter Updegrave

(MONEY Magazine) – When it comes to retirement advice, the mantra is simple: Save as much money as you can while you're still working, then try to conserve those assets in the early years after you retire to make sure that you don't outlive your nest egg.

But what if conventional wisdom is all wrong? What if you're actually saving too much for retirement now and could easily spend more than experts advise in the first few years after you leave the work force--all without running the risk that your savings stash will run dry?

That's the intriguing thesis put forth by Wisconsin planner Ty Bernicke in a recent article in the Journal of Financial Planning. Bernicke is convinced that traditional planning overstates how much you need to save because of flawed assumptions about how much you'll spend once you call it a career. Bernicke isn't arguing with the consensus that spending will initially drop as work expenses disappear and you no longer have to sock away money in retirement accounts (advisers typically say you'll need 70% to 80% of your pre-retirement income once you retire). But here's the crucial point of divergence: After you've settled into retirement, Bernicke contends, spending will continue to fall, rather than rise with inflation as the conventional view holds.

How the Theory Plays Out

Say you and your spouse plan to retire at 62 and figure you'll need $61,000 a year after taxes to maintain your lifestyle. Under conventional planning, you'd factor inflation at, say, 3% a year into your calculations, which means your annual spending would rise to just under $90,000 by the time you turn 75. But in reality, says Bernicke, people 75 and over spend about 25% less in any given year than those ages 65 to 74, judging by the Department of Labor Consumer Expenditure Survey. "What you actually have is a tug of war, with inflation pulling spending up and Mother Nature pulling it down as we get older and become less active," he says. The result is that we spend far less than most planners forecast. Bernicke estimates, for example, that Mr. and Mrs. 62 would actually be spending more like $54,000 by age 75.

Once you factor that lower level of projected spending into retirement calculations, two wonderful things happen, according to the process that Bernicke calls "reality planning." You find you can retire with a much smaller nest egg than most advisers recommend ($630,000 vs. $1 million for our hypothetical couple), and you can withdraw a higher percentage of your savings early in retirement since your spending will drop later on (for our lucky retirees, just over 7% vs. less than 5%).

What Could Go Wrong

So-called reality planning has undeniable appeal. But using previous generations' spending habits as a guide to your future strikes me as dangerous. Given today's medical advancements and longer life spans, you are likely to be more active and healthier than previous retirees, which could easily boost your spending; in any event, your individual circumstances may result in a very different pattern of spending. Nor is it wise to make an anticipated drop-off in spending a foundation for your planning. What if you discover at 85 that your spending hasn't tailed off as much as predicted and your nest egg has run dangerously low? What are you going to do--ask for a do-over?

Still, Bernicke does raise interesting questions about the crucial matter of spending in retirement. Considering that you are likely to rely on your personal savings far more than previous generations, it's time to look beyond generic formulas and take a more personalized approach to your retirement spending. Here's how I think you should factor the issues Bernicke raises into your planning.


If you're a decade or more away from retiring, it's simply too early to predict how much you'll really spend when you stop working. That means largely ignoring the reality-planning approach while you're still in saving mode, and going with the traditional assumption that your expenses will increase with inflation. That's the thinking embedded in most retirement planning software (including the Retirement Planner at In fact, that's exactly what Bernicke does with his younger clients. "I may sound like a hypocrite," he says, "but I'd rather err on the side of being too conservative." No, that's not being hypocritical; that's being prudent.


After you reach retirement, Bernicke's approach can be an improvement on traditional advice. After all, your spending probably won't go up by the inflation rate like clockwork every year. You may want to spend more early in retirement to squeeze in travel and other activities you couldn't manage during your career. You might then taper off as you become less active and the joy of being on permanent vacation wears thin. But you may need to increase your spending again late in retirement, when larger health-care expenses often kick in.

To adopt this flexible approach, you'll need to do a rigorous budget that gives you an accurate sense of your expenses throughout retirement. Start by thinking about the type of lifestyle you plan to lead in retirement and what types of activities you'll pursue. Then ask yourself a few critical questions about your spending: How much of your budget is devoted to essentials like food, health care and house maintenance--bills that you have little control over and that are likely to rise with inflation? How much do you spend on discretionary items like travel and entertainment, where you have more leeway for cutting back? This will give you a sense of how much wiggle room you'll have to adjust spending later on.

Detailed budgeting requires considerable time and effort, so you may want to consult an adviser. But if you're up to the number crunching, there are a few tools available to help. For example, Fidelity's Retirement Income Planner has an online budgeting worksheet with room for 49 items and allows adjustments for expenses that will eventually disappear, such as mortgage payments (this tool, though, is available only to Fidelity customers at You can download a similar interactive "post-retirement budget" by clicking on Free Programs at, although it requires more work to fill out.


The danger in assuming that your spending will vary in different stages of retirement is that you could end up spending too much early on and depleting your savings--or, just as bad, living too parsimoniously because you're scared your money will run out. So it's imperative that you revisit your budget at least every couple of years and update it based on your actual spending, plus any new information you may have about your future bills. After consulting with an adviser or plugging your revised budget into the appropriate software, you can decide whether you should continue to spend at your current rate, need to cut back or can even splurge a bit.

What you don't want to do, however, is blithely assume that your expenses will drop as you age. Because if you turn out to be wrong, you may indeed end up spending less late in retirement--but only because you have no other choice.