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Spend more, live better

By Jennie L. Phipps · Bankrate.com
Tuesday, December 17, 2013
Posted: 4 pm ET

If you rely on one of the many online retirement planning tools to figure out how much money you'll need to live comfortably in retirement, you are probably overestimating what it will take by as much as 20 percent, says David Blanchett, head of retirement research for Morningstar Investment Management.

Blanchett came to his conclusions after reviewing "replacement rate" models utilized by these calculators. Blanchett says the calculators, which usually conclude that you'll need 70 percent to 80 percent of pre-retirement income, rely on the same basic spending assumptions for everyone. But not every retiree will spend money in the same way or on the same things. Also, the calculators don't take into account how life changes over time.

He thinks these calculators do a particularly bad job predicting 20 or 30 years of spending in retirement on health care. He also questions whether they accurately reflect how inflation affects retirement budgets.

"The spending on health care does rise," Blanchett says. "But if you spend more on health care, you spend a lot less on other things. If you're spending more on going to the doctor, you're spending a lot less on cruises."

He also believes inflation doesn't take as big a bite out of most retirement budgets as calculators predict, because over the course of the lifespans of both a husband and wife, spending drops -- and then drops some more. He finds that budgeting an average annual 1 percent increase for inflation is sufficient for many couples -- at least, over the long haul -- because of the slowdown in spending as both age and one dies.

Blanchett warns against using his theory as an excuse to save less and spend more without understanding your individual situation. He suggests that a couple preparing a retirement budget look hard and as realistically as they can at what factors in their lives will likely change over time. He also recommends front-loading the budget. "It is probably OK to plan to live better when you are younger," he says. "There is a risk that if you don't spend it at 65, you won't get a chance to spend it."

Most advice about spending money in retirement emphasizes "saving, saving saving," he says. "But recognizing when, where and how to spend money is also an essential component of a well-planned retirement."

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2 Comments
Ripley
December 18, 2013 at 1:04 pm

The decline in standard of living from dropping to 70-80% of final income may not be as great as you expect in retirement because you are no longer saving for retirement and certain work-related expenses (i.e. dry cleaning, need for a second car, etc.) vanish in retirement.

The larger problem is the inability of people to retire at all becuase they haven't saved much for retirement

John R Klein
December 18, 2013 at 12:57 pm

I think Mr. Blanchett has hit the nail on the head regarding inflation and front-loading your budget in retirement. Having written that, we currently are not experiencing high inflation, but his remarks regarding spending still are valid. The premise may not hold if inflation were to run rampant. As for front-loading your budget, that is primarily the key to successful retirement, provided you have the time or income to do so. Why lower your life style in retirement? Part of the purpose in retiring is to enjoy your older years. Why effectively lower your standard to 70-80 percent of normal and live like a relative pauper. I realize that all is subject to the vagaries
of life such as health, job and income stability, coupled with personal goals and a generally favorable economy.