Many readers responded with disbelief to my recent column about financial planner Ty Bernicke and "reality retirement planning." The basic idea, which Mr. Bernicke discussed in a Journal of Financial Planning article, is that conventional financial planning goes astray when it assumes that our spending will rise forever. If our spending declines in retirement, we won't need to save and invest as much. More people will be adequately prepared for retirement. The relentlessly dismal future will be a happier place.
I think that's really good news, but many couldn't believe it. Others chose to believe that any decline in consumption expenses would be overwhelmed by increases in medical expenses.
So let's take a closer look.
Using the 2002 Consumer Expenditure Survey, Mr. Bernicke showed that total average annual expenditures for 45- to 54-year-olds were $48,748. The same figures showed that every category of expense except health care declined in each following ten-year period, bottoming at $23,759 for those who were 75 and over. That's a drop of 49 percent in 30 years, a compound annual decline of 2.37 percent a year. The decline does a lot to offset inflation.
But let's start with age 55 to 64--- the period when most people retire. What happens then?
For that group, total consumption declines from $44,330 to $23,759 at 75. That's a decline of 46 percent in 20 years, an annualized rate of 3.07 percent. That's enough to offset the overall rate of inflation, which means your actual income could be flat and you'd be doing fine. (The actual figures, by category, are in the table below.)
Senior Spending: Transcending Consumption
|This table shows the decline in each of the major categories of consumer spending as households move from retirement age to mid-retirement.|
|Spending Category||55 to 64||65 to 74||75+||Percent Change|
|Apparel & Services||$ 1,791||$ 1,252||$ 674||(62%)|
|Entertainment||$ 2,297||$ 1,371||$ 896||(61%)|
|Food and Alcohol||$ 5,979||$ 4,803||$ 3,446||(42%)|
|Transportation||$ 8,449||$ 5,731||$ 3,178||(62%)|
|Personal Insurance & Pensions||$ 4,838||$ 1,853||$ 696||(86%)|
|Miscellaneous||$ 4,138||$ 3,593||$ 3,028||(27%)|
|Health Care||$ 3,007||$ 3,588||$ 3,584||Plus 19%|
|Total Average Expenditures||$44,330||$32,243||$23,759||(46%)|
|Source: Journal of Financial Planning, June 2005, for 2002 Consumer Expenditure Survey|
As someone approaching his 65th birthday, I can tell you this looks perfectly reasonable. Let's examine the categories.
Personal Insurance & Pensions (down 86%). This category plummets. It should. Saving and insurance may continue in retirement, but much of it can be reduced or eliminated. Many cash value life policies, for instance, are fully funded.
Transportation (down 62%). Car payments are for kids. Grown-ups pay cash. One of the cars my wife and I own is no longer insured for collision, it is so old. We'll buy fewer cars in the future and keep them longer.
Housing (down 40%). This is another "End of the Monthly Payments" thing. But it's more than that: By the time you're in your late 50s you're likely to have what you want in furnishings. Shelter spending winds down on its own.
Apparel & Services (down 62%). Nature helps. The Imelda Wall, a long closet wall lined with my wife's high heels, has been gone for years. She's still beautiful. I'm still charmed by the way her feet touch the ground. But high heels are no longer part of her life. My wardrobe is down to four feet of closet space. I'll never be a clothes horse, but it doesn't matter. All the clothes in the world wouldn't make me George Clooney or Brad Pitt.
Food & Alcohol (down 42%). Whatever level you start from, age will reduce the bill simply because you can no longer abide late nights. The only offset is increasing quality in food, wine, and restaurant choices---and that's voluntary. Entertainment is the same. It's difficult to spend a lot on entertainment when you like to be home before ten.
Healthcare (up 19%). "Average" expenses are like the river with an average depth of one foot. Some will still drown. If you stay healthy you won't spend much. But that's a big "if."
Miscellaneous (down 27%). My wife and I love this category. If we didn't, we wouldn't put so much in it. That may explain why it declines less than other spending categories. Does spending less mean life becomes dull and empty as we age? Not a chance. It means we make different choices. It means the Age of Stuff is over. It means the Age of Living can thrive.
One of the blessings of maturity is thinking less about yourself and more about others. We transcend mere consumption. This may inspire terror in advertisers, but older people see a lot of stuff as silly.
My wife and I, puzzled about our Quicken-based spending chronicle, discovered that the most growth was in a single murky area. It now has a name.
We call it "Feasting and Gifting."
Have you had the same experience? Let me know. Had a different experience? Let me know about that, too. Write to email@example.com.
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Sunday, July 17, 2005: A Little Savings Grace