Myth-Busting: Retirement Spending Assumptions

By Dan Sexton


Google “how much will I spend in retirement” and you’ll see that most answers are based on the “80% Rule.” This widely published “rule of thumb” states that after you retire your desired spending level will be roughly 80% of your pre-retirement spending. So, if you’re spending $150,000 per year now, assume you’ll only spend $120,000 per year in retirement.


Now take that thumb and hit it with a hammer!


Why the 80% rule doesn’t work

I don’t know why the pundits think that your spending will decrease once you stop working, because that’s not what we see in our practice. If you’re like most of our clients, you’ll probably find that for quite a while you spend the same amount or even more in retirement than you did while working. We usually do not see a decrease in spending until ten, fifteen or sometimes twenty years into retirement. Here are some of the most common reasons why:

  • You want to travel. Although this expense generally decreases over time, many retirees are excited to have the time to indulge their travel bug, either by traveling to those places they couldn’t while working or by traveling more. A travel trend I see with clients is hosting a family vacation with children and grandchildren.
  • You want to pursue new hobbies. You finally have the time to pursue your passion. It could be golf, painting or photography. Whatever your interests are, you end up spending a bunch of money on equipment, lessons and then better equipment. Better yet, you decide to kill two birds with one stone and combine your hobby with travel (see above).
  • You may need to keep up with new technologies. Twenty-five years ago, cell phones were a luxury; now a smart phone or tablet computer is a necessity. What about having wireless internet in your home? What’s next? Having the ability to charge your electric car in the garage? I know my own parents never thought about the need to have a home computer. Who knows what “must have” technology will exist twenty years from now—and what its price tag will be?
  • Your kids might move back home. Couple student debt with the rising cost of housing, and you can see how multi-generational living could be the wave of the future. This might increase your living costs in many ways (food, utilities, insurance). However, there is also an upside. As you age, if you find you need a little bit of additional care, living with working children and sharing the burden of the cost of living could be a net positive.
  • Your health care costs might be very high. According to the Genworth 2018 Cost of Care Study, the median cost of assisted living is currently $4,500 per month, and the median cost of nursing home care is currently $9,817 per month. If you live in Southern California where I and my clients live, expect to pay a lot more. Even the best long-term care policy is not likely to cover all these costs.


Don’t let all this derail you
If you are feeling overwhelmed or scared, thinking you may never afford to retire…don’t. Some of this additional/new retirement spending might be absorbed by the money you were once putting away for retirement, but no longer are. If you were a good saver these “redirected funds” might cover a good deal of your additional spending.


Of course, there’s a chance that you may not be deeply affected by any of these scenarios. You could be the product of good genes and live a long healthy life where your health costs are not a great concern. Or maybe you are a luddite and prefer simple living. Everyone’s experience is different.


Here comes the bogeyman

Be aware, though, that there could be a bogeyman waiting in the shadows you have not considered. Much of the assumption that you’ll be spending less during retirement is based on the idea that you’ll be earning less and therefore paying less in taxes. On this theory, you may even drop down to a lower tax bracket altogether.


This is true for some, but not all, and fewer still for our clients. Having a large retirement account or lucrative pension will almost guarantee your tax obligation will not change. You may have a one or two-year reprieve but as soon as you’re required to take mandatory distributions from your retirement accounts, you may find that your taxable income is nearly the same as when you worked for a living. In other words, be careful expecting tax relief in retirement.


So how much will you be spending in retirement?

There is no easy answer and no guarantees here. Your best approach is to work with a fee-only financial planning and investment management firm such as RS Crum to get expert assistance with your retirement plan—including discussing how your budget is likely to change in the years ahead. That way you’ll have a realistic plan that incorporates your unique situation, goals and dreams.