Has your financial planner told you to save more?

He may be dead wrong.

He isn't alone. Most of the models used for retirement planning may also be wrong for the same reason. The models and their supporting software are based on an assumption that isn't supported by real data about how our spending changes as we age.

This is no a tempest in a teapot.

As recently tested by Ty Bernicke, a Wisconsin financial planner, a couple that conventional planning would have going broke at age 80 could instead leave an estate of $2.4 million at age 85. 

Retirement spending assumptions, in other words, can make the difference between being dead broke and minor league rich.

The conventional wisdom in financial planning is that we will need to replace most of our earned income at retirement.  Worse, inflation will cause the income we need to grow every year until we die. It's a convenient assumption because it's easy to program into computer models. Unfortunately, it also shows most people running out of money before they die.

There is no evil intent in this assumption. It was made because it was easy to program and because most of us don't want to think about how our lives actually change as we age.

But it doesn't reflect real life spending decisions.

Six years ago two academic researchers, Kenn Taccino and Cynthia Salzman, examined spending patterns as people age. Their findings, which were discussed in one of my columns, showed that spending peaks in our late 50's and early 60's, declines in our late 60's, and declines still more after age 75.  They suggested many people might be better prepared for retirement than they thought they were.

Now Mr. Bernicke has taken a big step forward. Writing in the June issue of the Journal of Financial Planning, he introduces "Reality Retirement Planning" based on an even closer examination of our spending as we age.  The 2002 Consume Expenditure Survey, for instance, shows that average annual expenditures decline from $44,330 for the 55 to 64 age group to only $23,759 for those over 75. That's a decline of over 46 percent.

A closer examination using data from the H. S. Dent Foundation shows expenditures declining from $45,862 for the 55-59 age group to $38,218 for the 60-64 age group, $32,103 for the 65-69 age group, $27,517 for the 70-74 age group, and $21,402 for the 75+ age group. That's a decline of more than 50 percent.

Like Tacchino and Salzman, Mr. Bernicke also shows that the decline isn't forced: net worth actually increases as we age from 55 to 75.

So what happens if you substitute Mr. Bernickes "reality retirement planning" for conventional retirement planning? His example couples' spending needs rise from $60,000 at age 55 to $125,626 at age 80 under conventional assumptions. It doesn't surpass $60,000 until age 81 under reality assumptions, reaching only $67,963 at age 85.

Under conventional assumptions the example couple's spending starts to overwhelm their $800,000 nest egg, exhausting it by age 80. Under reality assumptions, the nest egg is never overwhelmed. It shrinks slightly during the first seven years but then begins to grow. It builds to $2,364,871 by age 85. Subjected to Monte Carlo Simulation testing, the plan fails 87 percent of the time with conventional spending assumptions. It never fails--- zero percent--- under reality assumptions.

It's pretty easy to come up with "Yes, but" responses to this research. Some will cite Aunt Betty, the party animal, who is taking luxury cruises at age 90. Others will cite Uncle Bill, who lived in the Alzheimer's unit from age 62 and didn't have Long Term Care insurance. Readers in their thirties may find it difficult to believe that two glasses of wine is more than enough at 65, but it generally is.

Only advertisers know the truth: After 60, coveting and consuming start to fade.

This isn't bad news. It's a testimony: Nature is on our side.

On the Web:

Sunday, April 4, 1999: In the Future, You'll Need Less Money

Journal of Financial Planning, June 2005 Reality Retirement Planning: A New Paradigm for and Old Science

Journal of Financial Planning, April 1999 Kenn Tacchino and Cynthia Salzman, Do Accumulation Models Overstate What's Needed to Retire?