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We should be thinking about retirement more holistically, and bring each consideration into the discussion around how to reach the best retirement outcome.

Using Age Banding To Estimate How Spending Will Decline In Retirement

The traditional approach to saving for retirement might not be appropriate after all.

The very essence of saving for retirement is to accumulate a nest egg sufficiently large enough to replace the retiree’s employment income and sustain a stable standard of living throughout retirement. If the prospective retiree doesn’t have enough saved up to maintain his/her lifestyle for the next several decades, it’s not yet time to retire.

Yet a growing volume of research studying the actual spending habits of retirees is revealing that this traditional approach may not be entirely appropriate after all. Because as it turns out, retirees don’t actually maintain a stable lifestyle in retirement; instead, spending levels tend to decline (in real terms), as the retiree goes from the “Go-Go” early years of retirement, to the “Slow-Go” years, and eventually the “No-Go” years.

In addition, not only does retirement spending slow in the later years, but the underlying composition of the retirement spending begins to shift as well as clients cross through these “age bands”, as spending on housing and entertainment activities fall significantly in the later years, while health care expenses are rising. Still, though, discretionary spending tends to fall by more than health care expenses rise – leading to an overall decrease in retiree spending as retirees proceed through the age bands.

Ultimately, this suggests that rather than merely assuming a stable standard of living throughout retirement, a better approach may be to look more directly at not just the composition of the retiree’s spending goals, but also how those particular types of expenses tend to change as the retiree moves through the different age bands. In other words, projecting retirement expenses using an age-banding approach may allow for a more nuanced and accurate representation of how spending will change over time. Which is important, because the data indicating that retiree expenses tend to fall throughout retirement – especially in some categories – implies that retirees may not actually need to be saving as much, or accumulating as large of a nest egg, to retire in the first place!

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